Mumbai:A Reserve Bank of India (RBI)-appointed panel to suggest regulations for the country’s microfinance institutions (MFIs) has proposed a 24% cap on the interest rate that they can charge, a limit on the amount a person can borrow, besides recommending a separate category of non-banking financial companies (NBFCs) in the sector.
The much-anticipated recommendations have been unveiled as the Rs20,000 crore industry has come under intense pressure because of recent stringent law in Andhra Pradesh, which accounts for a quarter of microcredit loans, that have brought repayments to a halt.
The Andhra Pradesh law was prompted by accusations of profiteering and strong-arm tactics being used by MFIs to extract repayments.
The RBI panel, headed by chartered accountant Y.H. Malegam, including deputy governor K.C. Chakrabarty, has also made it clear that the new category of NBFC-MFIs will not come under the Andhra Pradesh law and will be solely regulated by the central bank.
The committee said its recommendation, if accepted, must be implemented by 1 April, as “the borrowers are currently suffering some hardships for which relief must be provided at an early date”. In any case, the recommendations on the lending rate cap should be made effective on all loans given by MFIs after 31 March, the panel said.
Mint reported on 28 December that the stoppage of fresh loans by MFIs in Andhra Pradesh has forced borrowers to depend on moneylenders, who had raised rates to usurious levels.
The law enacted by the Andhra Pradesh government in October restricts MFIs from weekly collections and makes government approval mandatory before giving further loans. Following this, collection rates fell to 10-20% and MFIs virtually stopped lending to borrowers. Banks also stopped lending to MFIs, with Yes Bank Ltd even calling back such loans.
The Malegam committee recommended a four-pillar approach, with the responsibility for implementation being shared by industry associations, banks and RBI.
Microcredit companies loan small sums of money to the poor at 24-32%, against the 36-50% and collateral that moneylenders usually charge. The panel said that MFIs should not seek any collateral for loans.
The panel has recommended a margin cap of 10% for MFIs having a loan portfolio of Rs100 crore and 12% for smaller MFIs, referring to the difference between the rates at which they borrow from banks to lend to customers.
The loan amount to a single borrower should be capped at Rs25,000, the committee said, adding that outstanding loans should also not exceed that amount. It has also proposed that loans up to Rs15,000 should not have a tenure of less than 12 months, while for other loans it should be at least 24 months.
The borrower should also have the option of paying a loan in advance, without any penalty, and have a say on the place of collection, it said.
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 Rs3,800 crore to Rs18,344 crore.
Senior MFI executives said the report has taken a balanced approach on core issues, but a few of the provisions such as limiting the loan amount to a single borrower and membership in more than one self-help group (SHG) could hurt business.
“While overall the recommendations are good for both the industry and borrowers, it is difficult to comply with a few like the cap on loan amount and an annual family income at Rs50,000,” said Vijay Mahajan, president of the Microfinance Institutions Network, a grouping of MFIs. “These are difficult to follow and need to be sorted out.”
The panel has suggested that not more than two MFIs can lend to a single borrower.
Also, a borrower should be a member of only one SHG or joint liability group, it has said.
“Most of our borrowers are members in more than one SHG. Also, their loan requirement, in many cases, will be well above Rs25,000. This could create problems to most of the MFIs,” said Kishore Puli, managing director and chief executive officer of Hyderabad-based Trident Microfin Pvt. Ltd.
The MFI should restrict processing fees to 1% of the loan amount, the panel said.
With a view to ensuring adequate bank funding for the microfinance sector, the committee has also recommended that bank lending to NBFC-MFIs will be accorded “priority lending” status.
Earlier in the day, RBI announced several measures, including allowing banks to restructure loans given to MFIs without classifying them as non-performing assets, even if they are not fully backed by collateral, to ensure liquidity support to the ailing industry.
Banks can do this till 31 March, the banking regulator said.
While MFIs will be the immediate gainers, such restructuring will help banks minimize the risk of the loans turning bad.
Indian banks had a combined exposure of around Rs14,000 crore to the microfinance industry as of 31 March, according to the National Bank for Agriculture and Rural Development.
The central bank has also asked banks to recycle loans to the sector (which means they will lend to MFIs, money that they, or other MFIs pay back) to ensure that the business stays healthy. It has also asked banks to adopt the consortium approach while lending to MFIs.
Current norms do not allow banks to restructure standard assets that are unsecured or not backed by collateral without first classifying it as a bad loan.
“The measures allow banks to restructure loans even if the loans are unsecured,” said Dilli Raj, chief financial officer of India’s largest and only listed MFI, SKS Microfinance Ltd.