The government has released the draft Micro Financial Sector (Development and Regulation) Bill, 2011, which seeks to make it mandatory for all microfinance institutions to be registered with the Reserve Bank of India, making it the sector regulator.

The Bill in its earlier avatar had proposed that the National Bank for Agriculture and Rural Development (NABARD) will be the regulator of the sector.

Click here to find the draft Micro Financial Sector (Development and Regulation) Bill, 2011

The government had introduced the Micro Financial Sector Bill in March 2007 in the Lok Sabha. However, the Bill lapsed as the term of 14 Lok Sabha expired in 2009.

The latest draft Bill proposes that a micro finance institution has to be registered with the Reserve Bank with the minimum net owned fund of Rs 5 lakh (Rs 500,000).

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Besides, a Micro Finance Development Council will be set up to advise the government on formulation of policies, schemes and other measures required in the interest of orderly growth and development of the sector and micro finance institutions, to promote financial inclusion.

The council will comprise of members not below the rank of executive director from NABARD, National Housing Bank, RBI and SIDBI.

Besides, joint secretaries from ministry of finance and the ministry of rural development will also be members.

It also proposes that any micro finance institution which is not a company registered under the Companies Act, 1956 and which becomes systemically important micro finance institution shall convert its institution into a company registered under the Companies Act, 1956 with or without a licence under section 25 of the Companies Act, 1956.

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It should happen within six months from the date of the balance sheet which shows that it has become systematically important micro finance institution in terms of the rules prescribed by the Central government, its draft Bill said.

The RBI may pass an order directing micro finance institution to cease and desist from continuing the micro finance activities if it is found acting in manner prejudicial to the interest of its clients or depositors.

The RBI would cancel the certificate of registration granted to a micro finance institution if it fails to comply with the directives or condition.