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    Home»Microfinance»India Microfinance

    Legislations affecting Microfinance Institutions in India

    Sushma SinghBy Sushma SinghAugust 26, 2023 India Microfinance
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    Legislations affecting Microfinance Institutions in India
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    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.

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    sushma
    Sushma Singh

      Sushma is a seasoned business writer and content creator with over 7 years of experience in the field. She has a talent for taking complex topics and breaking them down into easily understandable language that engages and educates her readers. Her expertise allows her to cover a wide range of topics relevant to the B2B industry, providing business owners with the knowledge they need to make informed decisions and drive growth.

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