Regulation and Supervision of Microfinance in India

India has started moving towards a comprehensive regulatory structure for microfinance, with policy makers increasingly feeling the need to have such a framework in place. The Finance Minister in his budget speech for the year 2005 has indicated that a draft bill on microfinance will be introduced in the fiscal year 2005-06. However, presently, there is no distinct regulation governing microfinance specifically. The term “microfinance” was defined by a Task Force set by the National Bank for Agriculture and Rural Development (NABARD) in 1999 as “Provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban or urban areas for enabling them to raise income levels and improve living standards.” The Reserve Bank of India (RBI) has drawn on this definition in its subsequent directives on microcredit and microfinance.

Microfinance Institutions (MFIs) in India have taken diverse legal forms, each constituted under different laws. The following table presents the different institutional forms along with the Acts regulating them.

Institutional Form	Act
Societies	Societies Registration Act,1860 Or State Legislations (Some states have their own societies registration acts such as Tamil Nadu and Karnatka)
Public Trusts	State legislations prescribing establishment and administration of public trusts.
Cooperatives	Cooperative Societies Act,1912 Or State Cooperative Societies Acts Or Mutually Aided Cooperative Societies Act (for states where this has been legislated, for example Andhra Pradesh) Or Multi State Cooperative Societies Act, 2002 (for cooperatives operating in more than one state)
Not for Profit (Section 25) Companies	Section 25 of the Companies Act, 1956
Non Banking Financial Companies (NBFC)	Companies Act, 1956 and Registration also required with the Reserve Bank of India (RBI)
Banks	Specific Acts such as State Bank of India Act, 1955 etc. Or Companies Act, 1956, with license form RBI under Banking Regulation Act Or Regional Rural Bank (RRB) Act (the central government may establish an RRB through a notification in the official gazette) Or Cooperative bank sunder state credit cooperatives/national credit cooperatives/ mutually aided cooperative societies acts

While RBI is the overall regulator of the financial sector in India, the control it exercises over the different set of microfinance institution varies. Thus on one hand, a commercial bank providing microfinance through Self Help Groups (SHGs) has to comply fully with the disclosure norms set by the RBI, on the other, societies and trusts are minimally supervised.