Government's Role in Microfinance - How does India's compare?

Our conference a couple weeks ago with the Reserve Bank of India's training arm (RBI), the College of Agricultural Banking (CAB), made me think a fair amount about government's role in microfinance. Undoubtedly, India's government has played a large promotional role in Indian microfinance. The creation and growth of self-help groups through NABARD funding is quite impressive. Since the early 1990's, over 20 million Indian women have received credit through the government's SHG programme. At the same time, the fastest growing segment of microfinance, private microfinance institutions, does not seem to receive much government support (or that much regulatory supervision for that matter).

Accordingly, I have been doing a little research on the role government typically plays in microfinance. CGAP has an interesting piece that provides examples of government practices in several nations (e.g., Bosnia, Armenia, Brazil), which points out that governments often play 3 different type of roles:
1) Protector - The article argues that governments should develop appropriate regulations, or adapt existing banking regulations, to protect the solvency of large institutions that collect deposits from poor people. (In India, the government has largely not played much of a protector role. One reason may be that private MFIs are not allowed to take in formal savings deposits.)

2) Provider - Here I would argue India's government is a pioneer. By using public sector funds that did not go to the priority sector designees (e.g., agriculture, low-income households) to finance self-help groups, India's government created the foundation for microfinance in India.

3) Promotional - This could include financing or creating policies that facilitate the growth of microfinance. Going with my points above, I think (and the CGAP piece points out) that India's government does do a lot to finance the sector. On the policy side, there is room for improvement.

With regards to policy in India, in March of 2007 the Union Government introduced the Micro Financial Sector Development and Regulation Bill 2007 in the Lok Sabha – the lower house in the parliament of India. To this point, the bill has not been signed or rejected; I believe it still sits in the Lok Sabha.

My colleagues at CMF, Minakshi Ramji and Yusuke Taishi, wrote an interesting 2-pager on the bill's main characteristics and its possible implications for the sector. Interestingly, NABARD (which funds the government's SHGs) would become the regulator. As the authors point out, this could be a conflict of interest for agency. Additionally, the bill would allow some MFIs to mobilise savings, but it does not encompass non-banking financial companies or non-profit MFIs, which are two of the faster growing types of MFIs. Over the past year and a half, the draft bill may have changed significantly, but the initial draft is at the least the baseline for possible legislation.

I wonder which direction future policy and legislation will go in India. Personally, I hope that 1) savings are permitted, 2) any microfinance bill encompasses all types of MFIs, and 3) the government does develop a more concrete policy framework for microfinance.