India: RBI Wary of PE Investment in Microfinance Institutions

Apr 2010
India, April, 06 2010 - In the past ten days there have been two instances of microfinance institutions getting major fund infusions from private equity and this is beginning to worry the Reserve Bank of India (RBI).

Their worry is more when a committed promoter of MFI like Vikram Akula chose to sell off his stake to private equity investors.

The RBI is in a quandary as to how to treat private equity investments in what has so far been seen as a social purpose or a not for profit function like microfinance lending.

The RBI, however, is not in a hurry to move from what CNBC-TV18 hears from officials. Microfinance institutions are themselves not registered with the RBI. But NBFCs which lend to microfinance institutions come under the purview of the RBI.

Another way in which the RBI is connected is banks that lend to microfinance institutions can define that lending as priority sector lending in which case they keep less capital and therefore can give loans at a cheaper rate. If that loan is not passed on with the required corporate governance in terms of lower lending rates then the RBI can legitimately be concerned about lending practices.

RBI officials told CNBC-TV18 that what they propose to do was to tell the lending banks to exercise more corporate governance, to sensitise or check whether microfinance institutions to which they are lending are on lending in a humane manner and that they don’t become oblivious to the fact that these are run by private equity investors and they are perhaps not governed by the best of standards.

Officials were equally concerned that the RBI should not move in a hasty manner because a lot of microfinance institutions are doing a lot of good. If the RBI or any other government body moved in a hasty manner even the little amount of money going to the poor may be denied.

Source : News Center

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