Assessing constraints in micro-credit regulation

CMF Research Associate: Rati Tripathi
CMF Intern: Daniel Radcliffe
Timeline: Project completed in August 2006

India's microfinance sector has become an international focal point for experimentation and innovation in extending financial services to the poor. The CMF believes that the sector's evolution has outpaced India's accompanying microfinance regulatory framework. For example, the 2006 microfinance crisis in Andhra Pradesh reflects a growing disconnect in the way various stakeholders in the sector interpret existing microfinance regulation and how they believe future legislation should be crafted.

Based on extensive interviews with banks, MFIs, independent consultants and government officials, this study identified five pressing regulatory impediments to India's micro-credit sector: 1) interest rate regulation, 2) transparency and disclosure norms, 3) third party ratings, 4) equity investment and 5) minimum capital requirement for non-banking finance company (NBFC) licenses.

This report makes recommendations to policy makers on these issues, such as allowing the third party rating market to mature, softening majority ownership requirements for foreign equity holdings in NBFCs, and building a simple monitoring system to track interest rates across MFIs.

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