India: Reserve Bank of India to Enforce Most Malegam Panel Proposals from 1 April

Mar 2011
New Dehli, India, March, 19 2011 - MFIs will have to lend 90% of their total loans in compliance with the new rules; existing loans will be exempted.

The Reserve Bank of India (RBI) is set to implement most of the recommendations of the Malegam panel to regulate India’s Rs.22,000 crore microfinance industry from 1 April, but existing loans of microlenders will be exempted from the new norms initially, according to three persons familiar with the development.

This means that microfinance institutions (MFIs) will be unable to give fresh loans to anyone whose household income is more than Rs.50,000 or credit of more than Rs.25,000 to a single borrower.

MFIs will not be able to charge more than 24% interest. Besides, they will have to cap their margins at 12%.

Two of the three persons are bankers and one the head of a leading MFI. All three declined to be named.

At a meeting with bankers on Thursday, RBI made it clear that the industry should be prepared to accept most of the suggestions of the panel, including the cap on family income, size of loan and interest rate from 1 April.

The regulator had held discussions with top bureaucrats of state governments in February. It will meet MFIs next week in the last round.

Once the new regulations come into play, all MFIs will have to lend 90% of their total loans in compliance with the new rules and if they fail to do so, such loans will not be treated as priority sector advances.

Priority sector status for such loans is crucial for MFIs as banks mainly lend to them to cover their mandatory lending requirement. Under current norms, Indian banks are required to lend 40% of their loans to agriculture and other weaker sections. If banks fall short of this target, they can buy the loans of MFIs to meet the level.

MFIs are engaged in the business of giving tiny loans to poor borrowers. Typically, they lend at 24-32% or even a higher rate, citing high operational costs. They get money from banks at 9-12%.

The existing loans of microlenders will be exempted from the new regulations, which will be offered “grandfathering” to facilitate a smooth transition. Grandfathering implies allowing their continuation in compliance with the old rules, after these are changed, for a certain period.

At Thursday’s meeting, banks told RBI they were not keen to launch an industry-wide loan restructuring for MFIs and this can be done only on a case-to-case basis.

“Banks said they are ready to restructure loans of those MFIs which have majority exposure in Andhra Pradesh, but those having (relatively) minor exposure can seek alternative means to overcome the crisis,” one of the bankers said.

RBI has also mandated the Indian Banks’ Association, the national bankers’ lobby, to take stock of bank funding to the microlending sector since mid-January when it had asked banks to resume lending to the crisis-ridden microlending industry and recycle loans to enable the sector tide over the crisis, until new regulations are in place.

The Malegam panel was appointed in October to review microfinance industry regulations after the sector plunged into a crisis following the Andhra Pradesh government restricting operations. Andhra Pradesh accounts for more than a quarter of India’s total microlending loans.

The state law barred weekly collections and made government approval mandatory for every second loan to a borrower.

The regulation hit MFIs, causing a sharp fall in collection rates and forcing many of them to stop fresh lending. Banks, too, stopped fresh funding to the sector.

The Malegam committee, which submitted its report on 19 January, recommended that MFIs with a loan portfolio of Rs.100 crore should not keep a margin of more than 10%. For the smaller MFIs, the margin is capped at 12%.

According to the panel, the number of outstanding loan accounts serviced by MFIs in the country between March 2007 and March 2010, rose from 10.04 million to 26.7 million, while the outstanding loan amount increased from about Rs.3,800 crore to Rs.18,344 crore.

Senior officials of the microlending industry said they will argue against the Rs.50,000 family income cap the panel has recommended as it is impractical to assess this.

Besides, this will also disqualify 70-80% of the existing borrowers of MFIs from accessing microcredit.

“It is unrealistic to limit the annual family income at Rs.50,000 and a large part of the market is going to be excluded from the fold of microfinance. Also, assessing the annual income of the borrower is extremely impractical,” said Alok Prasad, chief executive officer of Microfinance Institutions Network.

Source :

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