Criticises strong-arm collection tactics
After the Reserve Bank of India (RBI) tightened the noose on India’s micro-finance institutions (MFIs), it is now the turn of the Prime Minister’s Economic Advisory Council (PMEAC), which on Wednesday said that MFIs must work within a stringent regulatory mechanism.
“There should be a limit on interest charged on borrowers and a format for providing loans,” PMEAC Chairman C Rangarajan said.
MFI growth in India has been remarkable in the past five years in the wake of most formal financial institutions showing reluctance to serve the poor and micro-enterprises due to the prevalence of repayment risks.
In 2009, there were about 27.5 million borrowers and 84 MFIs, with an estimated portfolio of $4 billion, according of official data, which says, the annual growth over the last five years has been 62 per cent in terms of clients and 88 per cent in terms of MFI portfolios.
While, the RBI has acknowledged that the role of MFIs is important as they facilitate financial inclusion, there is a raging controversy over their anti-poor activities, with the charges against them involving usurious interest rates and strong-arm collection tactics employed by some MFIs.
Concerned over the problems of multiple lending, Rangarajan also said that MFIs should discourage multiple loans to same borrowers. Two or more loans by the same household from a single source is referred to as multiple borrowing.
Multiple borrowing has emerged as a major cause for concern as it is usually taken by the small borrower to pay off the existing debt, which in fact creates a vicious cycle of debt for the borrower.
“Strong-arm tactics adopted in recovering loan repayments have evoked much resentment. Equally, the business models adopted by many large MFIs were wrong.
Multiple loans to borrowers for non-productive activities are a self-defeating exercise,” the PMEAC chief said.
According to him, the overall cost to borrowers must be maintained at a level consistent with the repaying capacity of borrowers.
Following the Malegam Committee recommendations in the aftermath of the Andhra microfinance fiasco, the RBI had bunched together the microfinance sector as a niche segment within the category of non-banking financial companies and brought them under its direct regulation.
It had also set strict lending norms for the sector and asked them to start provisioning for defaults. Under the new rules, MFIs are not allowed to lend at more than 26 per cent interest, and margins on borrowed funds cannot exceed 12 per cent.
Also, not more than two MFIs should lend to the same borrower, while one borrower should not be a member of two groups simultaneously.
The frequency of repayment instalments should be decided by the borrower.
SOURCE: Deccan Herald
Even while the regulatory apparatus for microfinance is under serious debate, the Reserve Bank has chosen to introduce one more classification of non-banking financial companies purveying credit to micro-finance activities — namely, NBFC-MFIs — based on the recommendations of the Malegam Committee.
This raises several concerns in the backdrop of the legislation by the Andhra Pradesh (AP) State already in vogue, the overall interest rate policy, and policies relating to financial inclusion.
The trigger for this move is evidently the micro-finance crisis in Andhra Pradesh, following reports about usurious lending practices combined with coercive recovery procedures adopted by microfinance institutions. The Andhra Pradesh legislation draws its powers from ‘money lending’ Constitutionally coming under the States’ jurisdiction. The Act applies to all entities engaged in the business of microfinance, including NBFCs regulated by the Reserve Bank.
The Reserve Bank recognises the inherent conflict of this move when it comments on AP legislation in its Trend and Progress Report thus: “If State Governments start enacting their own legislations to regulate MFIs, including the ones regulated by the Reserve Bank, there will be a plurality of regulation, leaving scope for regulatory arbitrage.
The responsibility for regulating NBFCs has been given to the Reserve Bank, thus empowering it to regulate the NBFC-MFIs. If other States also come out with legislation similar to the AP Government, it will raise concerns not only about multiple regulations but also about client protection, as borrowers would then be subject to different regulations.
If there are separate regulations governing NBFC-MFIs in individual States, the task of regulation by the Reserve Bank of MFIs operating in more than one State will become even more difficult. This may also impact the business of MFIs, which are operational in more than one State.” One question that arises is that in the case of Andhra Pradesh at least, how this inherent conflict will be handled in respect of NBFC-MFIs.
According to press reports, the Andhra Pradesh Government feels that while some aspects of the RBI norms were good, the lack of implementing mechanism would make them ineffective. The State government has taken the stance that micro-loans in the State would continue to be regulated as per the State Act.
What are the implications of this? First, there will be dual registration. Second, the codes of conduct for recovery would be different. The AP legislation prohibits recovery agents and coercive methods of recovery and all repayments have to be made at the office of the gram panchayat or at a designated public place. Third, AP legislation stipulates that loan recoveries have to be made only in monthly instalments, whereas the RBI directives have a different provision.
MFIs as a Class
MFIs as a class gained its significance in the recent past mainly because of their ability to borrow from commercial banks and, in turn, the ability of commercial banks to include such lending as part of priority sector lending. According to the Trend and Progress report, the number of MFIs increased from 581 in 2008-09 to 691 in 2009-10, but came down to 469 in 2010-11.
The loans disbursed by these institutions which went up from Rs.3,732 crore to Rs.8,063 crore but declined to Rs.7,605 crore during the same period. The total loans outstanding with commercial banks of MFIs as at end March 2011 is placed at Rs.10,689 crore.
The Reserve Bank has been expressing concerns about growth of bank lending to NBFCs because of the systemic linkage. The systemically important non-deposit-taking NBFCs’ borrowing from the banking system showed a whopping growth of 46 per cent in 2010-11 to Rs.1,37,827 crore.
Though MFIs are not as systemically important, some of them may grow into that category.
RBI has been following a policy of deregulating interest rates, and only recently the savings deposit rate was freed for the banking system. The current directives for NBFC-MFIs go against this stance. Furthermore, a ceiling of 26 per cent rate of interest would make it appear that usurious lending has RBI’s blessings. Even at the peak of interest rate cycle in the past, when directed credit was the norm, never was there a norm like 26 per cent for any sector. The question is whether this will set the trend for other microfinance lenders, such as non-profit MFIs, non-governmental organisations and self-help groups.
According to former RBI Governor, Dr. Y.V.Reddy, the for-profit MFIs are no different from money lenders and hence they need to be regulated as money lenders. Also, while money lenders lend out of their own funds, the for-profit MFIs lend out of leveraged funds obtained at lower cost.
Dr. N.A. Mujumdar, in his presidential address at the Indian Society of Agricultural Economics, welcomed non-profit MFIs into the stream of microfinance, but came out with a scathing attack on for-profit MFIs, calling them rogue MFIs.
Overall, while the RBI’s move brings in some equity angle of regulating for-profit MFIs, a better option would have been to apply the current regulation over non-deposit-taking NBFCs in general to MFIs, without treating them as a separate class, and disqualify commercial bank lending to NBFCs as part of priority sector, which also militates against the overall interest rate policy.
(The author is Director, EPW Research Foundation. The views are personal. email@example.com)
India’s Parliament is expected to take up a Bill for discussion in the ensuing winter session that will govern microfinance institutions (MFIs). When it becomes law, the Micro Finance Institutions (Development and Regulation) Bill will give more powers to the Reserve Bank of India (RBI) to regulate lenders that give tiny loans to poor borrowers at an interest rate much higher than what commercial banks charge. They do so as banks do not reach out to all micro borrowers.
The most critical part of the Bill is that MFIs registered with the Indian central bank won’t be treated as moneylenders. This essentially means they will be kept out of the purview of a state law, which has restricted the operations of microlenders.
Roughly a quarter of the Rs.20,000 crore industry is concentrated in Andhra Pradesh, India’s fifth largest state, where MFIs are seeing a rise in bad assets as many borrowers have stopped repaying loans. In October 2010, the state promulgated a law, which many say is draconian, following reports of coercion in recovering loans that allegedly led to suicides by a few borrowers. With the rise in bad loans, most banks have stopped giving money to MFIs. Typically, MFIs borrow from banks at around 12% and lend to tiny borrowers charging at least double the interest rate. Under norms, banks are required to give 40% of their loans to agriculture and small industries, among others, under the so-called priority sector tag, and banks’ exposure to MFIs is also treated as a priority sector loan.
There are two types of MFIs—one set operates as non-banking finance companies (NBFCs), and others as trusts. The trusts, though large in number, do not have sizable assets, and profit-making NBFC-MFIs need strict regulation. Early this year, RBI issued regulations to govern MFIs operating as NBFCs, based on the recommendations of an expert committee, headed by chartered accountant Y.H. Malegam.
The Bill is modelled on some of the recommendations of this committee. It has recommended capping the interest rate MFIs can charge at 26% and made a minimum two-year tenure mandatory for all loans above Rs.15,000. It has also recommended systemically important MFIs’ registration under the Companies Act. Besides, it has proposed the setting up of a Microfinance Development Council that will advise the government on policies and programmes required for the development of the sector, and state advisory councils for close coordination between the states and the Centre in this space. Among others, it has also envisaged a Microfinance Development Fund to be set up by RBI for giving loans, refinance, grants, seed capital or any other financial assistance to any MFI. Finally, it seeks to empower RBI to ask MFIs to cease their activities and even cancel registration if the central bank’s inspection team is not happy with their accounts.
In this context, it will be interesting to note some of the recommendations of an RBI working group that never saw the light of the day. Headed by V.K. Sharma, an executive director of the central bank, it submitted a report in August 2010 and I don’t know why it was given a silent burial. The working group took a close look at the key financial parameters such as return on assets (RoA), return on equity (RoE), net interest margin (NIM), and equity multiplier or leverage of banks, non-banking finance companies and MFIs.
NIM, or the difference between interest earned and interest expended as a percentage of total assets, for the banking sector in 2008-09 was 2.4%, but for MFIs it varied between 10% and 14%. If one subtracts RoA from NIM, one gets an idea about the intermediation cost for delivery of loans. For banks, it was 1.4%, but for MFIs it is 7-10%. This means the credit delivery cost of MFIs is five-seven times that of banks. They can reduce it by looking for a lower RoA, but they do not do so because they are more concerned about rewarding shareholders than spreading a credit culture.
The Sharma working group report also debunked the theory that MFIs have greater penetration than the banking industry’s reach through self-help groups (SHGs). It said that 33,000 rural bank branches have covered at least 100,000 villages, and in 2009 the banking sector lent Rs.22,700 crore through SHGs, while MFIs lent about Rs.15,000 crore in 2010.
The group was in favour of covering the unbanked tiny borrowers through the banking channel. This could be done through four ways—by giving banks freedom to open branches in centres with less than 50,000 population without RBI authorization; setting up brick-and-mortar branches in 73,000 villages by March 2012; allowing banks to arrange for doorstep banking services through banking correspondents in villages with a population below 2,000; and removing any ceiling on interest rates for small loans.
While the ceiling on interest rates has already been removed, most other issues are being addressed. A recent finance ministry note has also said that by September 2012, there must be at least one bank branch in villages with 5,000 population. RBI has identified 296 districts across the nation where there is less than one branch for 14,000 people, and the ministry note has asked public sector banks, which account for 70% of the industry, to open one branch every 80 sq. km in each of the 296 under-banked districts.
The working group had suggested that unless MFIs cut the cost of intermediation and eventually the cost of loans, banks should stop giving them money as a part of their exposure to priority sector. It had suggested a conditional sunset period till March 2012, and had MFIs not shown any progress in paring loan rates, they should be denied this facility. Banks, of course, can continue to give money to MFIs as commercial loans. A good idea that found no taker.
The Reserve Bank of India on Tuesday reaffirmed the need for regulations of the micro-finance industry by way of setting a separate category of NBFC-MFIs, in a move that may clear air on regulatory concerns, which the industry was facing so far, especially after the Andhra crisis.
The regulatory framework for this category will now be based broadly on the Malegam committee recommendations, which were earlier in May accepted by the apex bank with a tweak.
“By way of allowing a separate category for NBFC MFIs, the RBI has agreed to develop a framework of regulations that are designed to meet the specific needs of the industry, rather than addressing in the general umbrella. This had been a long-standing demand of the industry,” said Alok Prasad, chief executive officer of Microfinance Institutions Network.
Since May, NBFC MFIs followed the broad guidelines of RBI based on the Malegam Committee recommendations which included parameters like capping the interest rate at 26 per cent, margin cap at 12 per cent and also increasing the annual income limits for eligible households. Disallowing an individual to borrow from more than two MFIs, the credit limit now stands at Rs 60,000 for rural, Rs 1,20,000 for urban and semi-urban households.
Meanwhile, the Andhra Pradesh Government observes that the move may not bring about any change in the AP MFI Act.
“There will be no change in the state government’s role at least as of now, in protecting the borrowers from the fleecing MFIs. Any changes in the present MFI Act will happen only if the Assembly takes it up,” said R Subramanyam, Rural Development principal secretary.
The Andhra Pradesh government is of the opinion that Malegam recommendations are short of putting in a place an effective protection mechanism for the borrowers.
MFI Network, an umbrella body of non-banking finance company (NBFC) microfinance institutions (MFIs) that also seeks to serve as a self-regulatory body, admits that the sector erred in chasing a high growth trajectory at the expense of corporate best practices as it went for coercive methods in loan recovery while keeping interest rates two or three times that of banks. “Where the MFIs went wrong was in growing too rapidly, lured by the business opportunity, without paying much thought to execution or hiring the right kind of people. And there was a disconnect between the headquarters and the field agents,” MFIN CEO Alok Prasad told HT.
MFIs had faced flak for charging anywhere between 24% to 36% interest, with a net interest margin (NII) that was upwards of 12%. Prasad, however, defended the sector, claiming that the cost of funds itself was quite high for MFIs.
Following the outcry against MFIs in Andhra Pradesh, where cases of borrower suicides first came to light, the state government put in place a legislation to regulate the sector.
RBI’s six-member Malegam Committee, had recommended capping interest rates at 24% with NII at 12%. A draft MFI (Development and Regulation) Bill seeks to regulate the sector and imposes stiff penalties for non-compliance.
“The halo around the sector may have been exaggerated but it wasn’t entirely unmerited as MFIs sought to serve an important plank of social policy,” Prasad said.
The microfinance industry may finally be seeing the beginning of good times, with both equity and debt funding making a comeback into the sector. Owing to relative stability in the industry and increasing clarity in regulations following the Malegam Committee report, the last two months have seen better-than-expected activity on the venture capital (VC) and private equity (PE) fronts, with more expected in the next couple of months.
Last week, the UK’s Citi Venture Capital International pumped in R65 crore into Bangalore-based microfinance institution (MFI) Janalakshmi Financial Services. In May, Switzerland-based Blue Orchard Private Equity invested R4.5 crore in Mumbai-headquartered Svasti Microfinance. Ujjivan Financial Services, a Bangalore-based MFI, raised R30 crore in overseas non-convertible debentures (NCDs) and had also raised R65 crore from IDBI Bank and Sidbi in March. Securitisation deals include Avendus Capital’s buyout of R10.8 crore worth of micro-loans from Tamil Nadu’s Grama Vidiyal Micro Finance.
“Funds are not flowing in like they were prior to the crisis. But we are seeing some good signs. Fund suppliers are bullish for the long term due to the increasing clarity in regulations and Reserve Bank norms,” said Suresh K Krishna, managing director of Bangalore-based Grameen Financial Services.
The country’s microfinance sector, which has over R30,000 crore in outstanding loans to 300 crore borrowers across the country, has been facing a severe cash crunch since October last year. Lending by banks and investments had come to a standstill following regulatory changes by the government of Andhra Pradesh, which has the largest share of the microfinance market in the country.
“Apart from securitisation deals and NCDs, we have seen equity funding in the sector in the past months and we are extremely likely to see at least a couple of more in the next two months,” Krishna added.
Janalakshmi, for one, is looking at raising close to R65 crore in equity in the next one month. Grameen is looking at raising R300 crore to R500 crore in FY12, while Ujjivan is currently eyeing R100 crore in equity.
According to venture capitalists, funders still recognise the opportunity in financial inclusion, considering the headroom still available, and will continue to invest.
P Pradeep, chief investment officer of Avishkaar Venture Management Services, which invests in MFIs, said, “Nearly 80% of the microfinancing happens out of two states (Andhra Pradesh and Karnataka), and there is an enormous opportunity to grow here. To an investor, a good proposition, a good team and that team’s capability to plan and run the show are of greater consequence while investing. I do not think that investors will ignore the opportunity due to a problem.”
Avishkaar has recently concluded one deal in the space and may close another in the next one month. It is also looking at raising funds for MFIs it has lent to in the past and other companies in the microfinancing ecosystem, such as those which work on technology for financial inclusion. However, interest from equity players as well as social funds and development finance institutes has been encouraging, bank lending is yet to resume.
“Banks are still waiting for MFIs to come out with year-end financials and for fiscal assessments. The next two months should be a good indication of how bank lending will resume. However, I believe bank lending will fall with fewer banks lending, “ said Samit Ghosh, founder of Ujjivan.
At a recently concluded conclave on the microfinancing industry, the Associated Chambers of Commerce and Industry of India (Assocham) said that it was working on providing a platform for discussion between equity players and international MFIs to reduce the dependence on institutional lenders.
“Global microfinancing has around $12 billion in cross-border investments. Inbound M&A deals could emerge as a new trend in India’s MFI space,” Dilip Modi, president of Assocham, had said.
However, MFIs that have recently raised funds feel that there has been a sea change in the perception of equity players, who are now highly cautious in picking the right horse to back. Evaluations of business models, plans, teams, and understanding of process requirements are now far more stringent than a year ago, making it difficult for smaller organisations to survive.
By Krishnamurthy Subramanian, The Financial Express
The Reserve Bank of India (RBI)—broadly accepting the framework of regulations recommended by the Malegam Committee Report on Microfinance—in its Monetary Policy Statement for 2011-12, marks a denouement of the imbroglio that encompassed the microfinance sector ever since the ordinance issued by the Andhra Pradesh government in October 2010. This is thus a good point for us to reflect about the events that possibly led to the crisis. Such a reflection can give us robust directions for the way forward for the microfinance sector as a whole.
Needless to say, the opportunity for poverty alleviation that microfinance presents is hard to ignore. In fact, during the deliberations on the Malegam Committee report, which included the RBI functionaries as well as several market participants and academics, there was unanimity that the microfinance opportunity is hard to ignore. Also, the need for the regulators to play the role of the enabler was emphasised as well. That said, since one needs two hands to clap, the turn of events that led to the crisis in the first place necessitates that the microfinance industry undertake an exercise in self-reflection as well. The objective of this piece is to encourage the MFIs to reflect and emerge stronger going forward.
As we look back, we must recognise the fact that this ordinance followed a very successful IPO by SKS Microfinance. This may not be a mere coincidence! Undeniably, the poverty alleviation industry must include for-profit enterprises to generate efficiency gains, cost cuts and other spill-over benefits for the entire industry. However, the for-profit enterprises need to remember that their clientèle is different from those catered to by traditional businesses. Most people do not grudge the riches generated by a Narayana Murthy or an Azim Premji since they have made their money by serving wealthy corporations, governments or the burgeoning middle class. However, a super rich businessman that derives his riches by serving the poor is usually viewed with suspicion—the suspicion being that such riches have been accumulated by exploiting the poor. Note that with such issues that strike an emotional chord, it is beside the point whether the said businessman has indeed exploited the poor or not. Nor does it matter whether the businessman has played by the rules or not. The perception created is one of exploitation and it is this perception that the microfinance industry has to guard against.
While MFIs are certainly entitled to make profits, seeing them make supernormal profits goads opportunistic politicians to put a spanner in their wheels of progress: after all, being seen to be pro-poor is a perennial selling point among the electorate. Thus, MFIs need to dispel even the remotest perception that they are greedy capitalists waiting to exploit the poor for their own gain. This is because they have positioned themselves as institutions that work exclusively towards eradication of poverty. Becoming super-rich by claiming to eradicate poverty does not rest well with the emotional mind even if the rational one sees no conundrum in this phenomenon. Thus, seeking excessive returns would be to the detriment of the MFI industry in the long run because supernormal profits will eventually orient even well-meaning policymakers against the industry and hurt the industry in the long run. In this context, it is pertinent to note the quote made by Muhammad Yunus—the founder of microfinance. “Microcredit should not be presented as a money-making opportunity. It is an opportunity to make an impact on poor people’s lives. An IPO gives a wrong message,” Yunus was quoted as saying by the WSJ.
The following incident highlights the perils from pursuing supernormal returns in the context of microfinance. A few years ago, microfinance providers introduced loans that would help the borrowers to buy items such as a water filter, pressure cooker or a gas stove at prices less than the market price since the MFI itself would source them in bulk. Water filters gave the families clean drinking water and reduced the incidence of diseases, thereby increasing the number of working days and leading to an increase in income. The pressure cooker and the gas stove made cooking more efficient, enabling the women borrowers to save time and thereby invest more time into their particular business. Such constructive credit certainly provides tangible benefits to the borrowers. However, in their aggressive effort to generate more profits, the MFIs started providing loans for consumer durables such as refrigerators, jewellery, etc, which the poor borrowers could ill afford. Providing such loans to these poor borrowers is an instance of predatory lending. MFIs must resist crossing the fine line between providing constructive credit and encouraging consumerism and leading borrowers into a debt trap.
Furthermore, the MFI industry needs to recognise that clean and healthy competition is the cornerstone of any well-functioning market. The practice of the good boys constantly standing up for the bad boys is a syndrome that characterises a nascent industry. Now that the industry has become large, this practice of mistaken solidarity between the MFIs needs to be abandoned. If a rotten apple brings a bad name to the entire microfinance industry, then the good apples in the lot need to separate themselves from the rotten one by pointing out to the government, regulators, as well as the public at large, who the rotten apple is. The prevailing psychology has been for the good boys to think that they need to protect the bad boys to protect the industry. The good boys think they need the bad boys to appear big and influential while the bad boys shoot from the shoulders of the good boys. This psychology needs to change. The new psychology must be the one where the good boys think that they need to weed out the bad boys to protect themselves and the industry in the bargain. Being seen together with the bad boys hurts the perception of the good boys with the government, regulators and the public at large. In this context, as a first step, the industry association needs to come out with a strong statement condemning the uncivilised tactics adopted by some of its members. Second, the industry association needs to warn these members to discontinue such practices barring which they would report such practices to the government and regulators.
In sum, the MFIs have an opportunity to reflect upon themselves and emerge healthier by ironing out any wrinkles that might have crept in during their phase of extraordinary growth.
The author is assistant professor of finance at the Indian School of Business
Microfinance Institutions (MFIs) in Andhra Pradesh are in a state of confusion as some of the recommendations made by the Reserve Bank of India (RBI) for the sector are contradicting the rules prescribed by the State Government in its Microfinance Act.
Andhra Pradesh accounts for almost 25% of the Rs 30,000-crore microfinance trade in the country. As many as 24 of the total 44 MFIs recognised by the RBI are operating in the State.
The central bank, while accepting the Malegam Committee report, recently suggested that the repayment schedule (weekly or monthly) of loan can be chosen by the borrower.
However, the AP Micro Finance Institutions (Regulation of Money Lending) Act, 2011 clearly says that the repayment cycle should not be less than a month.
The dissimilarity may further affect the already crippling microfinance sector in the State, said Microfinance Institutions Network (MFIN), the representative body of micro lenders.
“There is absolutely no clarity on the issue of repayments schedule. There are two people (AP government and RBI) trying to regulate the system. It can only increase the confusion.
We will approach RBI, Finance Ministry and also the State Government for further clarity on the whole issue,” Alok Prasad, Chief Executive Officer of MFIN, told PTI.
The AP Government has no expertise in financial sector regulation. The RBI is the only institution that possesses the expertise and its regulation should be followed, he said.
“There is a duality crisis in Andhra Pradesh. The AP government must step out from trying to regulate financial institutions,” Prasad said.
On the other hand, the state government is up in arms against the RBI’s recommendations for the lenders.
The government has decided to oppose some of the recommendations announced by the RBI last week as a part of the monetary policy announcement.
Reddy Subrahmanyam, Principal Secretary (Rural Development), said the RBI did not address many critical matters like the issue of old loans extended by the MFIs at rates as high as 60%.
The interest rate being charged by MFIs should have been capped at 24% as recommended by the Malegam Committee, instead of allowing it to be 26%, he said.
“We are going to write a letter expressing our reservations to the RBI and Ministry of Finance,” he added.
The Rural Development Department of the state is gearing up take the apex bank head on.
In a recent communication to its officials, the Society for Elimination of Rural Poverty (SERP), a state government body that is empowered to regulate MFIs, said despite the RBI’s recommendations, the Microfinance Act will continue to apply to all MFI operations in AP.
“The government has got legislation powers from the Constitution, whereas the RBI’s power to issue executive instructions is a statutory power. Therefore, it is not in the domain of the RBI to annul the state legislation,” a government circular said.
“More so, the Act regulates the money lending aspects and transactions of the MFIs, which (fall) exclusively within the domain of the state government,” it added.
Microfinance companies finally have something to cheer about. In a move that will give more cushion to their margins, the Reserve Bank of India on Tuesday set the limit on the interest rate charged by companies in the sector at 26% as against 24% recommended.
Also, the central bank will treat all bank loans to microfinance companies after April 1 as priority sector lending. A RBI sub-committee, headed by Y H Malegam to study issues and concerns in the beleaguered microfinance sector, had in January recommended a 24% cap on interest rate on all individual loans.
“The RBI governor’s statement accepting the framework of regulations recommended by the Malegam Committee have provided a tremendous boost to the microfinance sector and reaffirm the critical role microfinance plays in financial inclusion,” Vikram Akula, chairman of sector leader SKS Microfinance, said in a statement.
RBI governor D Subbarao said at the Monetary Policy Statement for 2011-12 that the central bank had discussed the recommendations of the Malegam committee with all stakeholders. “In the light of the feedback received, it has been decided to accept the broad framework of regulations recommended by the committee,” Subbarao said. Besides the higher interest rate ceiling, the central bank also decided on a uniform 12% margin cap for all microfinance institutions.
The Malegam panel had recommended a margin cap—the difference between the borrowing and lending costs—of 10% for microfinance companies having a loan portfolio of 1 bln rupees and a 12% margin cap for smaller microfinance lenders.
The RBI also said the total indebtedness of the borrower can not exceed Rs50,000 and the tenure of loan can not to be less than 24 months for loans over Rs15,000, without prepayment penalty.
The central bank also said the borrowers must have the option to repay the loans on a weekly, fortnightly or monthly instalments. The central bank increased the annual income limits for eligible households to Rs60,000 for rural and Rs120,000 for urban and semi-urban. The RBI said it will issue detailed guidelines separately.
From Indian Express
The Reserve Bank of India (RBI) is likely to implement some of the Malegam committee recommendations on microfinance companies from April 1 this year.
“The Malegam panel proposals are likely to be implemented from April 1. Only new loans are likely to come under the guidelines,” said a banker. Besides, banks are keen on preserving the priority sector status for the microfinance sector, irrespective of the individual conduct of borrowing microfinance institutions.
“Bankers’ main reservation is nothing should happen by which some act or conduct or misconduct of MFIs should result in the priority sector status being withdrawn,” an official of the Indian Banks Association said after a meeting between bankers and top RBI officials.
Even though the Malegam committee has suggested the continuance of priority sector status for loans to the MFI sector, there are some conditions wherein the status can be cancelled due to the misconduct of borrowing MFI like using coercion, charging higher interest rate, etc.
“If the MFIs don’t do certain things vis-a-vis borrowers, don’t penalise me in terms of regulation by taking out sector,” he said.
He said that RBI was appreciative of the reservations expressed by the bankers. Top bankers, including Corporation Bank’s CMD Ramnath Pradeep, HDFC Bank’s MD Aditya Puri, Axis Bank CEO Shikha Sharma met RBI deputy governor K C Chakrabarty to voice their concerns regarding Malegam Committee recommendations on MFIs before they are ratified into guidelines on April 1.