There is a wide array of institutions and classifications that overlap in the India microfinance sector, making analysis difficult and identification of appropriate regulators confusing. Furthermore, the scope and reach of microfinance in India is hard to capture because direct bank lending is usually not included in microfinance analysis. Commercial banks in India are required to make a certain percentage of loans to designated “priority sectors.” Microfinance is one of the priority sectors banks may choose from, and loans are made to institutions as well as individuals in order to fulfill the requirement. As of April 2011, microfinance loans must meet certain prudential requirements in order to qualify for priority sector status. The majority of microfinance is provided by commercial banks, regional rural banks (RRBs), self-help groups (SHGs) (with special linkage programs to banks), cooperative societies, and microfinance institutions (MFIs) that take a variety of forms, including NGOs (registered as societies, trusts or Section 25 companies) and non-bank financial companies (NBFCs).
Banks and NBFCs are regulated by the Reserve Bank of India (RBI) with the National Bank for Agriculture and Rural Development (NABARD) supervising and inspecting RRBs; SHGs are regulated by NABARD; cooperative societies are regulated by the state-appointed Registrar of Cooperative Societies (RCS) and state government (with NABARD conducting supervision and inspections); and cooperative banks are regulated by RBI and RCS. Because not all register as NBFCs, most MFIs fall outside of the regulatory gambit though hundreds have joined umbrella self-regulatory organizations including Sa-Dhan and Micro Finance India Network (MFIN). Under pressure from RBI, MFIN has created a code of conduct in order to prevent over-lending to individual borrowers and plans to form ombudsmen offices to address grievances, while Sa-Dhan is developing a code of conduct as well. NBFC MFIs have also come together to form Alpha Micro Finance Consultants P Ltd, in order to provide credit bureau services to MFIs in India.
The widely-debated Micro Financial Sector (Development and Regulation) Bill was introduced in 2007, proposing important changes to the microfinance industry, but was never passed. In 2010, the Andhra Pradesh government issued the Microfinance Institutions Ordinance (later, the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act), which requires all MFIs to register as well as adhere to other rules set forth in the ordinance. In response, RBI formed the Malegam Sub-Committee to make recommendations on how RBI ought to regulate the microfinance industry. In response to the Malegam Committee report, RBI issued a May 2011 circular implementing some of the Malegam recommendations through prudential requirements for microfinance loans to qualify for priority sector status. RBI subsequently created a new category of NBFC-MFIs in December 2011 and issued directions aimed at addressing responsible pricing, transparency and over-indebtedness.
Additionally, in late June 2011, a revised Micro Finance Institutions (Development and Regulation) Bill was introduced before Parliament, most notably proposing RBI as the sole microfinance regulator in the country.
Microfinance & Banking
Banking and Microfinance
- Andhra Pradesh Micro Finance Institutions Ordinance (enacted in 2010) (English)
- Banking Regulation Act No. 10 of 1949 (amended through 2004) (English)
- Companies Act No. 1 Section 25 excerpt (enacted in 1956) (English)
- Master Circular on Lending to Micro, Small and Medium Enterprises (MSME) (enacted in 2008) (English)
- Master Circular on Lending to the Priority Sector (enacted in 2009) (English)
- National Bank for Agriculture and Rural Development Act No. 61 of 1981 (amended through 2003) (English)
- Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions (enacted in 2007) (English)
- Regional Rural Banks Act No. 21 of 1976 (amended through 1988) (English)
- Reserve Bank of India Act of 1934 (amended through 2009) (English)
- Andhra Pradesh Mutually Aided Cooperative Societies Act No. 30 (enacted in 1995) (English)
- Meghalaya Cooperative Societies Act No. 1 of 1950 (amended through 1976) (English)
- Multi-State Cooperative Societies Act No. 39 (enacted in 2002) (English)
Consumer protection in India is covered by both statutory regulation and by voluntary membership bodies. As discussed below, key players in consumer protection include the Reserve Bank of India (RBI), the Banking Codes and Standards Board of India (BCSBI), the Banking Ombudsman, the Indian Banking Association, and Consumer Courts as well as banks with internal customer service mechanisms.
First, RBI, a main regulator for banks and other financial institutions, establishes regulation and policy related to consumer protection. For instance, there are a number of circulars relating to fair practices at NBFCs. Additionally, the 2011 NBFC-MFI Directions include several provisions on pricing, transparency, recovery methods, and avoidance of multiple-borrowing.
Secondly, banks play a role in consumer protection by adhering to RBI issued regulations and guidelines, such as the Grievance Redressal Mechanism in Banks of 2008. This circular advises banks to implement an internal customer service mechanism that receives and addresses complaints from its customers and resolves complaints in a fair and efficient manner. These guidelines, which are further explained in a model document released by the Indian Banks Association, are also stipulated by the BCSBI. Similarly, the RBI Circular on the Use of Business Facilitators and Business Correspondents of 2006 requires each bank to establish "grievance redressal machinery" to redress complaints about services rendered by business correspondents and business facilitators and widely publicize this machinery through electronic and print media. These consumer-protection related requirements are further elaborated in the 2010 Guidelines for Engaging Business Correspondents.
In a majority of the states in India, the RBI has set up local Banking Ombudsmen, who act as arbiters of customers' disputes with banks. At an appellate level, ombudsmen handle complaints and grievances that have not been fully resolved by the banks or have not been adequately resolved in the opinion of the customer.
The Consumer Protection Act No. 68 of 1986, which impacts financial institutions, established the Central Consumer Protection Council and the State and District Consumer Protection Councils, and establishes courts at the district, state, and national level for the resolution of customer disputes. Courts are located in district headquarters and do not require legal representation in order to press claims; however, customers may be reluctant to pursue these options due to the duration of decision-making and the likelihood that banks will simply appeal unfavorable outcomes.
The Banking Codes and Standards Board of India (BCSBI), which started as a collaborative venture between the banking industry and the RBI in 2005, serves as an independent and autonomous watchdog for the industry. The BCSBI is engaged in developing standards, improving transparency, and improving relations between banks and customers, and boasts over seventy member banks. The BCSBI has developed the Banking Code Rules (covering member bank obligations to BCSBI) and the Code of Bank's Commitment to Customers Code (covering member bank commitments to customers), also referred to as the Fair Practices Code, with which all member banks must comply. The BCSBI also requires all banks to disseminate information to customers and manages a web-based helpline for customers although it is not widely used.
- Banking Code Rules (enacted in ) (English)
- Banking Ombudsman Scheme (enacted in 2006) (English)
- Code of Bank’s Commitments to Customers (enacted in 2009) (English)
- Consumer Protection Act No. 68 (enacted in 1986) (English)
- Guidelines for Engaging Business Correspondents (consumer protection related) (amended through 2010) (English)
- Master Circular on Fair Practices for NBFCs (enacted in 2009) (English)
- Non-Banking Financial Company – Micro Finance Institutions (Reserve Bank) Directions (consumer protection related) (enacted in 2011) (English)
- RBI Circular on Grievance Redressal Mechanism in Banks (enacted in 2008) (English)
- RBI Circular on the Use of Business Facilitators and Business Correspondents (enacted in 2006) (English)
- Circular on Financial Inclusion by Extension of Banking Services – Use of Business Correspondents (enacted in 2009) (English)
- Circular on Financial Inclusion by Extension of Banking Services – Use of Business Correspondents (amendment) (enacted in 2010) (English)
- Guidelines for Engaging Business Correspondents (amended through 2010) (English)
- Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks (enacted in 2006) (English)
- Master Circular on Branch Authorization (enacted in 2009) (English)
- Master Circular on Interest Rates on Advances (enacted in 2007) (English)
- Master Circular on Know Your Customer (KYC) Norms/Anti-Money Laundering (AML) Standards/Combating of Financing of Terrorism (CFT) Obligations of Banks Under PMLA of 2002 (enacted in 2009) (English)
- Master Circular on Maintenance of Deposit Accounts (enacted in 2005) (English)
- Master Circular on Para-Banking Activities (enacted in 2008) (English)
- Mobile Banking Transactions in India Operative Guidelines (enacted in 2009) (English)
- Payment and Settlement Systems Act No. 62 (enacted in 2007) (English)
- Policy Guidelines for Issuance and Operation of Prepaid Payment Instruments in India (enacted in 2009) (English)
- Prevention of Money Laundering Act No. 15 of 2002 (amended through 2009) (English)