Regulating Microfinance: A Suggested Framework

Abstract

With growth of the microfinance sector in India, there is a need to regulate it, so as to provide an environment in which all stakeholders can participate with confidence.

Both prudential and non prudential regulation is required. Prudential regulation is required to enable some micro finance institutions to provide savings services and affordable remittance services, significant missing links at present. Non prudential regulation encouraging transparent disclosure of interest rates, offering appropriate financial products, fair selling practices and methods for collecting loans is also important.

This paper proposes the creation of MFI banks which may be permitted to offer savings as well as mobile payment services, to be regulated by the country’s central bank, the Reserve Bank of India (RBI). In addition, for non prudential supervision for the sector as a whole, an independent oversight board with representation from participants in the sector, the Government and consumer forums, reporting to the RBI is suggested.

Keywords: Microfinance, Regulation, India, Financial Inclusion