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Saturday, Dec 14, 2002

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Regulatory system must for micro-finance bodies: Nabard

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WHILE expressing certain reservations on the ability of non-governmental organisations (NGOs) in transforming themselves into micro-finance institutions (MFIs) on a sustainable basis, the National Bank for Agriculture and Rural Development (Nabard) favoured the need for a regulatory and supervisory framework for an effective system of MFIs.

Addressing the two-day national workshop on "Key dimensions in transformation - from NGOs to formal institutions," being organised by the Small Industries Development Bank of India (SIDBI) here recently, the Nabard Chairman, Mr Y.C. Nanda, said the regulatory and supervisory framework for MFIs was necessary since savings was an important financial service that needs to be provided by the MFI to its clients.

Stating that the focus needs to be on building `governance' within the MFIs, Mr Nanda said the policy environment would have to take care of supervising and regulating the crucial factors related to governance.

According to Mr Nanda, there could be three stages for development of a regulatory system for the MFIs. The first stage would be to make the MFIs appreciate the need for certain common performance standards. The next stage would be making it mandatory for the MFIs to get registered with identified or designated institutions. The last stage would have to encourage development of network of MFIs that could function as quasi self-regulatory organisations or identifying a suitable organisation to handle the regulatory arrangements.

Stating that devising and setting common performance standards was an essential pre-requisite to make MFIs function efficiently, Mr Nanda said since there were no given benchmarks, setting performance standards might not be an easy task. These standards would have to be basically in the areas of prudential norms and disclosure requirements, covering areas such as portfolio management, management information system, internal control system and corporate governance.

Mr Nanda was of the view that complying with the regulatory framework would bring credibility and transparency to the operations of the MFIs, which would in turn enable the donors and even banks as first step towards their appraisal for providing loan funds.

"Since savings services form a crucial service for MFI clients, some norms to protect their savings like keeping certain minimum deposits with commercial banks may have to be introduced. The small MFIs serving limited geographical area would obviously be more risk prone in their loan portfolio, needing stricter and not softer prudential norms for the safety of the depositors' savings. Suitable audit requirements could help as part of supervision," Mr Nanda said.

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