The Ministry of Finance of the Government of India unveiled draft legislation earlier this month, aimed at bringing the microfinance industry within a central regulatory framework, and has opened it up for comment and feedback from various stakeholders.

The draft „Micro Finance Institutions (Development and Regulation) Bill 2011‟ comes nearly nine months after the Andhra Pradesh State Government passed an ordinance – later passed into state law – that imposed stringent restrictions on microfinance firms, particularly in terms of recovery and interest rates, and practically froze bank lending to the sector.

The size of the microfinance industry in India is estimated to be about Rs24,000 crore, of which Andhra Pradesh alone is estimated to account for almost a quarter, or Rs7,400 crore.

The AP law practically paralysed the microfinance industry, forcing some of the largest MFIs to enter corporate debt restructuring programs. The effect on smaller firms has been even more catastrophic.

Even now, the AP government is defending a court case filed in the state High Court against its MFI Act.

The draft Bill, though late in coming, is welcome, and will help resolve long-festering uncertainties about interest rates, margins, and an appropriate regulatory structure for the industry, while freeing up MFIs from the purview of differing state-level moneylending statutes.