News: Move to regulate Indian microfinance units

(TT 21/09/2006) New Delhi - The government is likely to bring in a legislation to regulate micro-finance institutions in the winter session of Parliament.

The finance ministry has drawn up a draft to set a minimum threshold capital level of Rs 25 lakh for microfinance institutions, with the provision that they can also accept deposits only if their capital base goes up to Rs 2 crore.

The draft, which is expected to be put up before the cabinet next month, will give NBFCs engaged in microfinance three years within which they will have to declare themselves section 25 companies or not-for-profit firms or register themselves as NBFCs.

They will be allowed to accept deposits only if they turn into NBFCs. Not-for-profit companies will be allowed only to on-lend money to self-help groups. The company law board will allow self-help groups to be members of section 25 companies.

Capital adequacy norms for such NBFCs will be 10 per cent of risk weighted assets. This is far more stringent than formal financial institutions, but is considered necessary as all microfinance loans are collateral-free loans.

The finance ministry will also make suitable changes in income tax laws to allow section 25 microfinance companies accept tax-free donations and contributions.

Officials said the interest charged by NBFCs and not-for-profit companies will have to be made public under the new legislation and the method of fixation has to be transparent. The interest could cover the capacity building and management costs as well. This is being done as there were allegations of certain microfinance institutions charging high rates and making huge profits.

While there will be no limits to loans to SHGs, the new legislation, when enacted, will set Rs 50,000 as the ceiling for loans to individuals under microfinance schemes.

At the same time, the government will consider a blanket income tax exemption for section 25 companies involved in micro-credit, including exemption from tax for income earned.

However, the new law will ensure that the savings or profits of SHGs, promoted by section 25 companies, are maintained only with permitted organisations like government securities, small savings funds and scheduled banks.