Micro finance institutions must be regulated: Kaushik Basu

Last Updated: Fri, Nov 26, 2010 12:10 hrs

New Delhi, Nov 26 (IANS) Micro finance institutions must be regulated to protect the interests of vulnerable borrowers and ensure growth of the industry, said Kaushik Basu, chief economic advisor of the finance ministry.

'We do need legislation to regulate micro finance institutions. You have to regulate it,' Basu said at a book release function here Thursday.

However, he said there should not be excessive regulation as it may impede growth of the industry.

'Micro finance institutions have made available finance to a large number of un-banked population. Its role is important in rural upliftment. The regulation should help growth of the industry,' Basu said.

Micro finance sector serves over 25 million poor people in rural and urban areas whom banks have failed to reach. However, some micro finance institutions are blamed for farmer suicides, especially in Andhra Pradesh, as they charge high interest rates and are often equated with moneylenders.

'Transaction cost is high so the interest rates will be higher. But we have to ensure that it is not excessive,' Basu said.

Finance Minister Pranab Mukherjee said last week that the government would soon bring legislation to regulate the sector.

Andhra Pradesh, which accounts for a third of micro finance institutions' lending, introduced a new legislation last month to regulate the microfinance industry.

Recognising the importance of the Rs.25,000-crore micro finance industry in rural upliftment, Basu said, 'You have to regulate it, but also have to make sure that you don't regulate it out of existence.'

The Reserve Bank of India (RBI) in October constituted a committee under the chairmanship of Y.H. Malegam, a senior member on the Central Board of Directors of the Reserve Bank of India, to look into various issues, including ways and means of making interest rates charged by micro finance institutions reasonable.

The committee is likely to submit its report in three months.

Based on the recommendations of Malegam Committee report, the government plans to introduce Micro Finance (Development and Regulation) Bill, 2010, Minister of State for Finance Namo Narain Meena said early this week.