Against the backdrop of a spate of controversies over the functioning of microfinance institutions (MFIs) and a growing demand for a regulatory body for this sector, the finance ministry has taken a step forward to form a committee to draft the regulations.

“The government has decided to constitute a committee to look into various aspects of a draft micro-finance (development and regulation) bill,” says a finance ministry note, which Governance Now has accessed.

Finance ministry joint secretary K V Eapen will head the committee which includes more than 10 members from the banking sector, state governments, NABARD and microfinance institutions.

“We are taking certain views on the states and central government related issues, money laundering and other issues related to microfinance. We will form final views on these issues in the committee,” M R Umarji, chief legal advisor of Indian banks association and a member of the committee, told Governance Now in an exclusive interview.

The ministry note says, “The committee shall examine various aspects for a draft bill taking into account the recommendations of the Malegam committee as well as the final views of the RBI on the report in this regard.”

“To what extent Malegam Committee report be implemented, it will be decided in the draft," Umarji said.

The panel will submit its report by the end of the next month. “The committee has been given a time frame of one month and it might go up to two months,” told Umarji.

He also said that the national bank for agriculture and rural development (NABARD) could be the regulator for microfinance. “The members from Nabard are on board. It is likely that they may be regulators for the microfinance,” Umarji said. Prakash Bakshi and U N  Srivastava of Nabard are among the members of committee.   

The committee will also taking help of MFIs in drafting the bill. Sa-dhan, an association of microfinance institutions is there on the board.

There is a growing demand for a strong and effective regulation of microfinance to end undesirable practices and put the sector back on the path of providing inclusive growth opportunities. The Malegam committee report, released in January, advocates a strong regulation of the sector.

The MFIs, on their part, sought to highlight the failings of the reports. “There is something wrong with the report because some stringent norms it suggests can affect the MFIs,” Mathew Titus, executive director of Sa-dhan, told Governance Now.

However, Titus urged for middle path in solving the issue. “Clearly, there has to be some middle path in terms of solution. The middle path can only come through discussion between different entities with the government,” he added.

The role played by some states especially Andhra Pradesh came under heavy criticism after the recent suicides and its government effort to discipline the lenders in the state. Microfinance in India has almost 100 million clients and is considered probably as the largest microfinance market in the world.