RBI Sub Committee to examine microfinance lending practices

Microfinance Focus, Oct 29, 2010: The Sub-Committee of the Reserve Bank’s Central Board of Directors which is chaired by Y H Malegam will examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers’ interests.
The Sub-Committee was set up after the Board’s October meeting to study issues and concerns in the micro finance sector. It will review the definition of ‘microfinance’ and ‘Micro Finance Institutions (MFIs)’ for the purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and make appropriate recommendations.
Further, it will delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives.
Applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs will also be examined and appropriate recommendations would be made. The role of associations and bodies of MFIs for enhancing transparency disclosure and best practices will be taken up.
The Sub-Committee will recommend grievance redressal machinery that could be put in place for ensuring adherence to the regulations recommended at 3 above.
Conditions under which loans to MFIs can be classified as priority sector lending will be looked at and appropriate recommendations will be made. MFIs currently enjoy priority sector lending status under which they get concessional funds from banks.
The Sub Committee was set up by RBI in order to study recent allegations about high interest rates, coercive recovery processes and multiple lending practised by some microfinance institutions. It was formed after the Andhra Pradesh government issued an ordinance to regulate microfinance institutions in the state.
The Reserve Bank of India regulates only those microfinance institutions which are registered with it as non-banking finance companies. Although the registered companies cover over 80 per cent of the microfinance business, in terms of number of companies they constitute a small percentage of the total number of MFIs in the country. The Reserve Bank, however, does not prescribe lending rates for these institutions.
Other members of the Sub-Committee include, Smt. Shashi Rajagopalan, Shri U R Rao, Shri Kumar Mangalam Birla and Dr. K C Chakrabarty, Deputy Governor. Shri V K Sharma, Executive Director, Reserve Bank of India will be the Member Secretary to the Sub-Committee. The Sub-Committee will submit its report in three months.

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