Piqued by the recent controversies surrounding the microfinance sector in India, the government may have moved to set up a regulatory body for the sector.

A strong and effective regulation of the sector is imperative to put an end to undesirable practices and put the sector back on the path of providing inclusive growth opportunities, said Shashikant Sharma, financial sector secretary in the ministry of finance at a conference of MFIs in New Delhi. “The sudden and rapid growth of MFIs has given rise to lending malpractices by some MFIs,” Sharma said.

While reiterating the government's commitment to the inclusion of the poor in acess to financial services, he stressed the necessity of regulating MFIs to safeguard their beneficiaries' interests. “There is a need for proper regulatory framework for micro finance institutions for protecting interest of small borrowers," said the top bureaucrat.

Recently, the Reserve Bank of India (RBI) indicated that some of the proposals of the Malegam committee on microfinance regulations, including a cap on lending rates, may be put in the place as early as April.

The Malegam committee report, released in January, advocates a strong regulation of the sector. “The future cannot be left entirely to the stating of good intentions. It, therefore, calls for strong regulation," the report notes. The committee was set up by the RBI after several allegations surfaced that MFIs were using strong-arm tactics to recover loans.

The MFIs, on their part, sought to highlight the failings of the reports. “The report has talked about the problems of sector. What the report has gone through is the details of the operation of the industry, where it has got flawed. Those are the deepest concerns. But 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. 

During various discussions, different speakers at the conference, however, supported idea of regulation in the sector but not at the cost of harming the sector. “Regulation is needed but it should encourage institutions to survive. Regulation should not harm smaller institutions,” said Vijaylakshmi Das, CEO of Ananya Finance for Inclusive Growth Pvt. Ltd at the conference.

The international MFIs admitted that the problem in the sector is worldwide. “Problems of India are not of here only, but found at different parts of the world,” Gregory Chen, regional representative for South Asia, CGAP commented in the conference.

The international players in the MFIs are also hopeful that India will swim over the current crisis in the sector. “I remain optimistic. Government, political structure, MFIs themselves and banks are all going to get together and come up with reasonable solutions. I don’t think it is going to be one solution and I think it will take long time and multiple stakeholders to work together for solutions, the sector is facing,” Richard Weingarten, managing director of Norwegian Microfinance Initiative told Governance Now.

The two-day MFIs conference has been organised by Sa-dhan, an association of microfinance associations in New Delhi. Wednesday is the final day of the conference.