Smart Regulation for Inclusion

Publication Date: 2008
Published by: The Economic Times
Document Type: Magazine Article

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Enabling MFIs to operate in a legitimate environment through better regulations

This article argues that muddled regulation will retard financial inclusion in India and obstruct the current government’s growth agenda. It recommends facilitative regulatory arrangements, instead of subsidies.

Privatization and competition have helped expand telephone services, mobile phone banking and insurance services to remote corners of the country, demonstrating that smart regulation helps service providers efficiently serve a larger population. The article supports its argument that similar smart regulation is lacking in the microfinance sector with the following facts:

• The Reserve Bank of India’s (RBI) business correspondent model compels banks to bear the cost of fees to the correspondent, making the model unviable;
• Central government efforts to provide MFIs with an enabling environment has been thwarted by the RBI’s reluctance to act as regulator;
• Creation of a dual regulatory regime, one for societies, trust and cooperatives and another for microfinance companies, has created a muddle over the provision of deposit services.

In conclusion, the article reiterates that the RBI should create a smart regulatory regime in order to encourage serious players in the microfinance space.