RBI sets broad framework for Malegam to study Indian Microfinance Sector

The Sub-Committee of the Reserve Bank’s Central Board of Directors today finalized its terms of reference. The Sub-Committee chaired by Shri Y H Malegam, a senior member of the Reserve Bank’s Central Board of Directors was set up after the Board’s October meeting to study issues and concerns in the microfinance sector. The terms of reference are:

1. To 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.
2. To examine the prevalent practices of MFIs in regard to interest rates, lending, and recovery practices to identify trends that impinge on borrowers’ interests.
3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives.
4. To examine and make appropriate recommendations in regard to the applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs.
5. To examine the role that associations and bodies of MFIs could play in enhancing transparency disclosure and best practices
6. To recommend a grievance redressal machinery that could be put in place for ensuring adherence to the regulations recommended at 3 above.
7. To examine the conditions under which loans to MFIs can be classified as priority sector lending and make appropriate recommendations.
8. To consider any other item that is relevant to the terms of reference.

There have been some concerns in the recent past expressed in the media about high-interest rates, coercive recovery processes, and multiple lending practices by some microfinance institutions. In order to study these and other related issues and implications for its policies and given the useful role played by the microfinance institutions in providing access to financial services to the poor and excluded, the Reserve Bank of India set up a Sub-Committee of the Central Board of Directors of the Reserve Bank to study the issues and concerns in this sector, including ways and means of making interest rates charged by them reasonable.

Shri Y H Malegam, a senior member on the Central Board of Directors of the Reserve Bank of India will chair the Sub-Committee. 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.

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 percent of the microfinance business, in terms of the 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.