1 The Proposed Statutory Mechanism for Regulation of Micro Finance Organisations (MFOs) Accepting Thrift A presentation by Cooperative Development Foundation, Hyderabad on 18 th January 2007 at the Annual Policy Conference of Sa-Dhan held in New Delhi on January 2007

2 Quotations from the first day proceedings: Mohandas Karamchand Gandhi: “The poorest of the poor should have control over their own lives and destinies.” Pawan Kumar Bansal, Minister of State for Finance, Government of India: “That government is the best government that governs the least.” Ela Bhatt, Chair Emeritus, Sa-Dhan: “The micro finance activity must be provided with a level playing ground and a friendly government policy.” Amitabh Verma, Joint Secretary, Department of Finance, Government of India: “The Union Government will validate the acceptance of thrift by MFOs.”

3 What is the title of the proposed Bill ? It is not titled as “Micro Finance Development and Regulation Bill”. It is titled as “National Bank for Agriculture and Rural Development (Amendment) Bill”. The NABARD is designated as the statutory authority for regulation of MFOs that choose to accept “Thrift”. The title of the Bill, in a way, is misleading, since the main objective of the Bill is to provide a statutory mechanism for regulation of micro finance activity.

4 What is an “MFO” ? The following legal entities that choose to accept “thrift” for providing micro finance services will be known as Micro Finance Organisations (MFOs): 1. a society registered under Societies Registration Act 1860; 2. a public trust registered under the Indian Trusts Act 1880; 3. a public trust registered under any state law regulating religious or charitable trusts; 4. a company registered under section 25 of the Companies Act 1956; 5. a cooperative registered under i. The State Cooperative Societies Act; ii. The Mutually Aided Cooperatives Act; iii. The Mutual Benefit Cooperatives Act; iv. The Multi State Cooperative Societies Act 2002; v. any other law relating to cooperatives in force in India.

5 What is “Thrift” ? Thrift means any monies (not exceeding such amounts as may be specified by NABARD from time to time) accepted by an MFO for providing micro finance services. In the context of the proposed Regulatory Mechanism, the entities mentioned in the previous slide can accept Thrift only after being registered with NABARD.

6 Powers of NABARD vis-à-vis MFO Management NABARD can issue directions to MFOs in the following instances: 1. in the interest of the public; 2. in the interest of the government policy relating to MFOs; 3. for preventing an MFO from conducting its affairs that are detrimental to its clients; 4. for preventing an MFO from conducting its affairs that are prejudicial to its own interest; 5. for securing proper management of an MFO. The MFO or MFOs concerned shall be bound to comply with such directions.

7 Powers of NABARD vis-à-vis MFO Audit, Inspection & Exemption 1. The NABARD may direct any MFO to appoint auditor, with its prior approval, subject to such conditions as the NABARD may specify from time to time. 2. The NABARD may direct the auditor of any MFO to audit any transactions of the MFO and the auditor shall comply with such directions 3. The NABARD may, at any time, cause inspection of any MFO in such manner and on such conditions as it may specify. 4. The NABARD may exempt any MFO from any or all provisions of the regulatory mechanism.

8 Power of Union Government vis-à-vis Offences committed by MFO and/or its functionaries No court shall take congnisance of any offence punishable under this Act, Rules and Regulations, save on a compliant made by the NABARD with the prior sanction of the Union Government.

9 Exemption to NBFCs The Bill chose to call non-banking finance company (NBFC) as micro finance institution (MFI) and excluded it from the proposed regulatory mechanism.

10 Exemption to SHGs Self Help Groups (SHGs), whether accepting Thrift or not, are excluded from the proposed regulatory mechanism.

11 The Union Government’s Power to Make Rules In addition to the regressive and undesirable provisions in the Bill, the Union Government is vested with the power of making rules for carrying out the provisions of the Bill.

12 The NABARD’s Power to Make Regulations The Union Parliament is being requested to enact a law that completely nullifies the principles of mutuality and cooperation. The Union Government is being vested with the power to make rules. A regulatory authority is expected to make regulations and the NABARD is being vested with that power.

13 Track Record of Government of India (GoI), Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) GoI, RBI, and NABARD have been exercising, for decades, the regulatory and supervisory powers in respect of: 1. State Cooperative Banks (SCBs) 2. District Cooperative Banks (DCBs); 3. Urban Cooperative Banks; 4. Regional Rural Banks. All these financial institutions, from there inception, are supposed to be micro finance institutions. Their present health does not speak well of GoI, RBI, NABARD.

14 Prospects for MFOs that Accept Thrift If the proposed Bill gets converted into an Act, one need not be an extra-ordinary skilled analyst (or a well reputed astrologer) to predict the fate of the Micro Finance Organisations that are supposed to be regulated by the NABARD, under the benign guidance and/or direction of the RBI and the GoI.

15 Duty of the Stake-holders and the Concerned Citizens Should the Stake-holders and the Concerned Citizens, mutely, allow the conversion of the MFOs Bill into an Act of Parliament? Answer is clear: No. They should not, at least in the form that it exists now. They should read the fine print; they should read between the lines. Then act.

16 Many Thanks for Your Kind Patience