Friday, February 4, 2011

Panel proposes 24 % interest cap on MFI loans

Separate category of NBFCs for microfinance institutions suggested

Sopan Correspondent / New Delhi

A Reserve Bank of India Committee has suggested that micro finance institutions (MFIs) be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs 25,000. The committee was formed in a bid to revive the crisis- ridden micro finance sector in the backdrop of the Andhra Pradesh government bringing an Ordinance to curb usurious practices by some such institutions.

The committee, headed by Reserve Bank’s Central Board Director Y. H. Malegam, also pitched for creation of a separate category of non-banking financial companies (NBFC-MFI) for the micro finance sector. The panel said small loans of up to Rs 25,000 could be given to families having an income up to Rs 50,000 per annum. On repayment, it said, the borrowers should be given the option of weekly or fortnightly or monthly return of the loan. It further said at least 75 per cent of loans extended by MFIs should be for income generation purposes while recommending that a borrower cannot take loans from more than two MFIs. The committee wants the recommendations to be implemented from April 1, 2011.

Industry body Microfinance Institution Network (MFIN) termed the recommendations as balanced. MFIN CEO Alok Prasad said, “It gives clarity to the industry requirements. The recommendations have been long demand of the industry.” On interest rate ceiling, he said, the micro finance industry was already moving in that direction, so it was nothing new.

The RBI constituted the committee in October last in the wake of allegations of overcharging and using coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh. The decisions taken by the State government to regulate MFIs slowed down the loan recovery process hitting the financial health of the sector. It was further aggravated by the reluctance of banks to support MFIs. Earlier, Prime Minister’s Economic Advisory Council Chairman C Rangarajan had also vouched for capping the MFIs’ interest rate margins.

About the regulations of MFIs, the Malegam Committee, suggested that it should be done by the National Bank for Agriculture and Rural Development (NABARD) in close coordination with the RBI. If the recommendations are accepted, the committee said, a separate law enacted by the Andhra Pradesh government would not be needed. With regard to NBFC-MFIs, the committee suggested that they should have a minimum net worth of Rs 15 crore.

The other members of the panel include industrialist Kumar Mangalam Birla, RBI Central Board member U. R. Rao and RBI Deputy Governor K. C. Chakrabarty. The report was widely awaited, as the Finance Ministry is expected to draft a bill to regulate MFIs on the basis of the sub-committee’s recommendations.

AP accounts for nearly half of the total MFI business in the country, with major players like SKS Microfinance, Spandana Sphoorty Financial, Basix and Share Microfin present in the state. The industry had practically collapsed in the state after the Ordinance of the state government which prevented the MFIs to recover the dues. They were lobbying with the government over the weeks to overcome the crisis which led to the formation of the Malegam Committee. It now remains to be seen what direction the government takes and what would be the shape of the proposed Bill for the purpose.

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