Reserve Bank of India Faces Off with Government Over Deposit-Taking MFIs
Blog Post
Oct. 20, 2011
This week India's central bank, the Reserve Bank of India (RBI) rejected the government’s proposal to allow microfinance institutions to accept small deposits. The plan, outlined in the Microfinance Institutions (Development and Regulation) Bill, permits MFIs to accept savings deposits, an opportunity currently afforded exclusively to formal banks and some non-banking financial companies. In its rejection, the RBI cited apprehension as to the safety of funds deposited with MFIs due to the past year’s unfolding microfinance crisis.
But is the issue really about protecting the consumer from MFIs that may play loose with the savings of the poor? On the contrary, it seems as though the proposed MFI regulations have become the victim of a turf war between the RBI, Lok Sabha (federal legislative body), and state governments. Traditionally, Indian federalism has been known for its contentious battles and the financial sector has been dangerously subject to political whims. In this case, the MFI Bill takes microfinance regulation out of the hands of the state, superceding Andhra Pradesh’s existing legislation. The federal government has used the MFI Bill to restrict state power; yet in a magnificently ironic fashion, the RBI rejected the deposit clause in order to restrict the Lok Sabha from sacrificing proper financial regulation for political gain.
The RBI really has no problem with MFIs accepting deposits, as long as the institutions are regulated by the central bank. If the deposit clause were to be accepted, it would create an additional regulatory framework where the RBI says one already exists - that for formal banking institutions. As quoted in LiveMint, Robin Roy of PricewaterhouseCoopers states “If MFIs are allowed to collect savings, there could be a multiplicity of regulatory structures and, therefore, there is a strong case not to reinvent the wheel.” Essentially, the RBI wants to pull MFIs even further under its wing, have them regulated as banks (which would in the end allow them to accept deposits), and ideally make them more independent of the Lok Sabha.
Unfortunately, the intentions of the RBI are not as clear as one would prefer. When it comes to financial regulation, in any country, we can never be too optimistic about rational actions. But for the sake of those in India who depend on MFIs for access to financial services, let’s hope the RBI has a positive ulterior motive for rejecting the government’s proposal for deposit regulation.