Legislations affecting Microfinance Institutions in India

1 min read
Legislations affecting Microfinance Institutions in India

April 9, 2010

Legislation Affecting Institutions Engaged in Micro-Finance (Directly or indirectly)

The Legal formats of MFIs that are provided by Indian law can be classified by the profit motive:

Not-For-Profit Entities are trusts, societies and section 25 companies.

For-Profit enterprises are Non-Banking Financial Companies (NBFCs).

The following legislations regulate the functioning of MFI’s in India

Legislations affecting Microfinance Institutions in India

(i) Reserve Bank of India Act, 1934 – rbiindia.org

The Reserve Bank of India Act 1934 establishes the central bank (Banking Regulatory Authority of India). It is of interest to the question of the regulation of micro-finance in that under a 1977 Amendment it contains provisions for the establishment and operations of non-bank finance companies (Chapter 3-B, Sections 45-I). The non-banking institutions can be a company, a corporation, or a cooperative society. A non-bank financial company (NBFC) is a non-banking institution company and takes deposits. NBFCs are registered under this Act (Second Schedule).

(ii) Banking Regulation Act 1949 – http://www.legalindia.in/banking-regulation-act-1949

The Banking Regulation Act 1949 covers “banking companies”. It does not apply to primary agriculture credit societies, cooperative land mortgage banks and any other cooperative society. It is not directly relevant to micro-finance, other than the fact that it coves local area banks and commercial banks, which are involved in linkage operations. The Banking Regulation Act provides the basis for the licensing of local area banks and mutual benefit societies.

(iii) Companies Act 1956 – http://www.mca.gov.in/Ministry/acts_bills.html

The companies Act 1952 provides the basis for the incorporation of Local Area Banks, Non-Bank Finance Companies, non-for-profit “Section 25 Companies” and Nidhis under Section 620.

Certain revisions have been proposed in the Companies Act which would allow cooperatives in the form of companies and could offer micro-finance services

Co-operative Societies Act of 1904; Mutually Aided Co-operative Societies Act in 1995 (Andhra Pradesh) Societies Registration Act of 1860 and the Indian Trusts Act -1882.

The term “cooperative” covers a range of institutions, both formal (state-owned cooperatives banks) and semi-formal (cooperative societies), which are regulated and/or unregulated.

Enterprises registered under the Societies registration or Indian Trusts Acts are semi-formal institutions engaged in micro-finance. The Acts do not provide a basis for any of regulation so far. There is a tax problem in that societies and trusts cannot engage in for-profit activities, including financial services.

Co-operative Societies Act of 1904 covers cooperative, SEWA Bank is registered as a co-operative society, under this act but is regulated by the RBI from which it obtained a banking license.

With the post-liberalization era, a market-oriented approach to rural finance advocated a new form of co-operative societies act. Andhra Pradesh enacted the Mutually Aided Co-operative Societies Act in 1995, allowing the formation of cooperatives largely immune from government intervention. Three other States subsequently enacted similar legislation (Bihar, Madhya Pradesh and Jammu & Kashmir). The Multi-State Co-operatives Societies Bill Act 2002 is operative currently and it replaces the MCS Act, 1984.

Sushma Singh

Sushma is a full-time blogger and financial expert. Join Sushma and 10,000 monthly readers here to learn how to save and invest your money wisely.

Follow Us