MFI Regulation, Part four. Why states should have a role

all right. so, here is something puzzling.

Microfinance practitioners insist their embattled industry should not be regulated by state governments. State governments, they say, do not know how to regulate financial organisations. Keeping microfinance institutions (MFI) under the purview of the state government, they add, will leave microlenders vulnerable to political pressures.

It is a set of arguments that has been accepted by an expert committee that wrote the draft microfinance Bill. The draft Bill, put up by the finance ministry, promises to override state laws. It also proposes that state advisory councils be set up to, among other things, monitor MFIs’ field-level conduct and give a feedback to the central government. Further, it says that if the RBI feels an MFI’s actions are hurting clients, it can issue orders to stop the functioning of the organisation.

It is not clear, however, if these measures can protect the MFIs’ poor and vulnerable borrowers.

think about it. the RBI is overloaded. and, even otherwise, incapable of monitoring field level conduct of MFIs with their poor borrowers. the state advisory councils are pointless. the bill is silent on how complaints will reach them, on how they will be investigated, and on how grievance redressal will take place.

all these are functions that only state governments can perform. they must have a role in regulating the mfis — at least their conduct with the borrowers. the whole argument, here.

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