RBI panel seeks tough norms to clip MFIs’ wings
Jan. 19: Microfinance companies will have to face much closer scrutiny if the Reserve Bank accepts the recommendations of the Malegam sub-committee, that were submitted on Wednesday. The committee’s recommendations seek to place a cap on the margins that microfinance companies can make, as well the number and value of loans that can be given to a single borrower.
Microfinance lenders have come under severe criticism over the past few months on allegations of very high interest rates and strong arm loan recovery tactics. Several highly indebted borrowers had allegedly committed suicide in Andhra Pradesh last year, which led to the state government’s intervention.
The committee has suggested putting microfinance lenders into a separate category of non-banking finance companies (NBFCs), called NBFC-MFIs. Key guidelines laid down by the committee include a cap of Rs 25,000 to a single borrower and that at least 75 per cent of the loans be given for income generating purposes.
If implemented, this should reduce the misuse of microloans to purchase consumption items such as television sets, which add to household debt but not to income. Apart from reckless lending, MFIs have also been accused of profiting from the poor, given the very high difference in what their cost of capital is and what they charge from borrowers.
The committee has recommended a “margin cap” of 10 per cent for MFIs having a loan portfolio of Rs 100 crore and of 12 per cent for smaller MFIs. It has also recommended an upper limit of 24 per cent on the interest that can be charged on individual loans.
Another recommendation that will help bring transparency to the sector is limiting lenders to just three types of charges — processing fee, interest and insurance charge. To reduce misuse of microloans from the borrowers side, the committee has suggested that one member should be restricted to a single self help group and that not more than two MFIs can lend to a single borrower. On the recovery front, the committee has two sets of suggestions.
Firstly, it has recommended a minimum period between the loan disbursement and repayment. It has also said that the lender and its management will bear primary responsibility for avoiding coercive recovery methods. Lastly, the committee has also suggested that the central bank must prepare a draft Customer Protection Code, which when implemented will have to be adopted by all MFIs.
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