RBI tells Banks to continue lending to microfinance sector

Microfinance Focus, December 22, 2010: In a meeting that was held in Mumbai today, the Reserve Bank of India (RBI) has asked bankers to continue lending to microfinance institutions as it is an important sector for the growth of the country, a bank official told Microfinance Focus.

During the meet, banks proposed consortium financing for the sector and discussed issues of over-indebtedness, high interest rates and lending practices of microfinance institutions.

Under consortium financing, several banks (or financial institutions) finance a single borrower with common appraisal, common documentation, joint supervision and follow-up exercises, these banks have a common agreement between them.

Banks lending to microfinance institutions declined sharply post promulgation of Andhra Pradesh microfinance ordinance in October. Bankers are keenly awaiting RBI’s Malegam Committee report on the sector which is expected to come by mid January.

The RBI suggestions can be viewed as a positive move to address the pressing concern of liquidity crisis which is impairing the microfinance sector.

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RBI tells Banks to continue lending to microfinance sector

dear sir/madam,

Most of Rural women need credit without any security against loan amount from Micro finance through out india .at that same time some MFI's amd NGO MFI's collect high interest rate from their clients.in the mean time so many NGO-MFI and MFI's Livelihoods and income lighting to rural poor-women's and semi-urban city. in this way I need RBI involved is very must to control MFI's Rate of interest.Matters.


Apprecable decision. Good for

Apprecable decision. Good for idustry and country.

Is microfinance the magic bullet?

I have no doubt in my mind that credit plays a crucial loan in economic growth and development, but I doubt that microfinance is the right answer.
“poor need microfinance to undertake economic activity, smoothen consumption, mitigate vulnerability to income shocks, increase savings, and self-employment.”
A source of steady income is the answer to income shocks, smooth consumption and savings for consumption. I am not sure if self-employment can be a source of steady income. Poor people need a system to mitigate local shocks and have access to bigger potential market for long-term growth. May be it is time that central banks should take a step back and test the effects of microcredit/ individual credit and small business credit on economic development indicators.
Also, it is time to know if poor people prefer self-employment or a job. May be lack of job opportunities is forcing them to take microloans. Does MF have an answer?

Entrepreneurship/self-employment versus (salaried) employment

It is interesting to read Saswati questioning the importance of self-employment and, therefore, entrepreneurship.

In the western world, economists in the Schumpeterian tradition ascribe innovation and technological change (and therefore the bulk of economic growth) to entrepreneurship - and the success of both Anglo-Saxon (US) and German economic models derives from innovation by technology start-ups and the Mittelstand respectively. Yet in emerging markets and transformation (i.e. former communist) economies there appears to be a general bias against small enterprise and entrepreneurship, with governments often bent on raising barriers to the creation of new enterprise.

Micro (and SME) finance in its different guises attempts to serve precisely this segment of the market, which - in western eyes - represents an important motor of innovation and economic growth. The debate that seems to have gripped India in the wake of events in Andhra Pradesh and elsewhere seems to question this basic tener of modern capitalism, whereas many of the apparent problems associated with the rapid growth of micro lending in India are probably caused more by a microfinance model what is closer to consumer than enterprise lending.

RBI tells Banks to continue lending to microfinance sector

Lending to MFI should continue by commercial banks.Micro finance borrowers mostly do not have a security to offer to the banks. Hence there is risk associated with the financing.Hence MFI's lend at a higher rate to cover the risk factor.

To overcome the problem the banks should ask for group guarantee,which ensures discipline on the part of the borrowers.
However RBI should take care that interest spread should not exceed a particular range.Otherwise they may charge a very high rate of interest or some hidden charges.
The borrowers are mostly poor people who are forced to pay very high rates of interest and also take high profits to compensate the high interest

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