Malegam panel for loan rate cap, RBI regulation

Malegam panel for loan rate cap, RBI regulation

Mumbai: The Malegam committee, set up by the Reserve Bank of India (RBI) to chalk out a framework within which microfinance institutions (MFIs) in India should operate, is set to recommend an upper ceiling for interest rates chargeable to poor borrowers, two persons familiar with the development said.

The panel also seems to be in favour of bringing in all for-profit microlenders under RBI regulations.

The committee is in the process of finalizing the report and may submit it to the central bank next week.

What the ceiling on the lending rate for MFIs could be is not immediately known, but persons familiar with the matter said it will be “reasonable".

The panel, they said, is basing its recommendations on a Basel committee report that tweaks principles of banking supervision to suit regulation of MFIs. It also offers a view of the policies which banking supervisors of some countries have adopted with respect to microfinance.

The Basel committee is a panel of banking supervisory authorities established by the central bank governors of 10 countries in 1975. Currently, it consists of senior representatives from the bank supervisory authorities of 27 countries, including India.

Apart from recommending a ceiling for interest rates, the Malegam panel also wants to make it mandatory for all “for-profit" lenders and MFIs that operate as non-banking financial companies (NBFCs) to provide a threadbare calculation of their cost of operations, including cost of funds and the spread, or the difference between what they spend on mobilizing money and what they earn deploying the money in the form of tiny loans.

Incidentally, banks in India, too, are required to disclose their cost of money, margin kept, etc. while fixing their base rate, or the minimum lending rate.

The panel was set up in October under the chairmanship of noted chartered accountant Y.H. Malegam to examine the functioning of microcredit lenders in India and their regulations. Other members on the panel are Kumar Mangalam Birla, Shashi Rajagopalan and U.R. Rao—members on the board of the central bank—and RBI deputy governor K.C. Chakrabarty.

The constitution of the committee followed the turmoil in Andhra Pradesh’s microfinance sector, where a spate of suicides were linked to alleged coercive methods adopted by certain MFIs to recover loans.

In the wake of concerns being expressed on the high interest rates being charged by some MFIs, strong-arm tactics to secure repayments and cases of multiple lending, the Andhra Pradesh government passed a legislation regulating microfinance operations in the state. It mandated MFIs to specify their area of operation, rate of interest, recovery practices and operational systems to the government authorities. The law also mandated MFIs to seek the approval of the state government before issuing any fresh loan.

Recovery of loan instalments in Andhra Pradesh plunged to as low as 10-20% and fresh lending to borrowers in the southern state, which accounts for a quarter of the total microfinance business in India, also come to a grinding halt.

If RBI accepts the recommendations of the panel, the report will form the basis of central bank regulations for MFIs. These regulations will not supersede the state law in Andhra Pradesh, but if they address the concerns of the state authorities in terms of loan rates and other critical issues, the state may not aggressively implement the law.

The panel also does not seem to be against MFIs’ plan of tapping the capital market for funds to expand business. Indian MFIs are not allowed to take public deposits. SKS Microfinance Ltd, the only microlender listed on the bourses, raised 1,654 crore through a public float in August.

The for-profit MFIs are currently treated on a par with NBFCs. MFIs with a loan portfolio of less than 100 crore are required to file quarterly returns with the banking regulator, but those with bigger books, 100 crore or above, are classified as systematically important institutions and they file monthly returns.

For the last six months, RBI has also made it a norm for its regional directors to meet with the senior management of companies with a portfolio of more than 1,000 crore at least once every quarter.

Apart from these measures, there are some inspections by RBI officials from time to time.

A 2010 review report of the financial performance of Indian MFIs published by Sa-Dhan, an association of microcredit lenders in India, stated that around 45% of MFIs in the country have a portfolio of less than 10 crore, and 8.6% of such institutions have a portfolio of 100-500 crore. Around 7% have a loan book in excess of 500 crore.

Only the top MFIs, around 20 of them, that operate as NBFCs, are regulated by RBI currently, though the central bank does not prescribe the lending rates they can charge.

The remaining MFIs, around 800, are not under the purview of the central bank.

Any recommendations of the Malegam committee extending to for-profit MFIs that subsequently become regulations will bring a larger number of MFIs under RBI’s ambit.

According to Chandra Shehkar Ghosh, chairman and managing director of Bandhan Financial Services Pvt. Ltd, one of the top five MFIs by assets, a potential capping of interest rates will not make much difference to the larger players who have already scaled down rates, but it will affect the newer and smaller entrants.

“Any such ceiling will compel smaller players to defer costs as they can no longer build it into the interest rates charged to borrowers beyond a limit. Now, small MFIs will first look to build scale before incurring costs," Ghosh said.

SKS Microfinance has, with effect from 11 January, cut its loan rates across India to 24.55% from 28-31%.

The Basel paper, on which the Malegam committee is modelling its report, clearly demarcates the permissible activities and licensing criteria for MFIs from other financial services companies that are into traditional retail lending.

“The types of permissible microfinance activities, including microcredit and microsavings and microinsurance, should be clearly defined in laws or regulations and tied to the size of the institution and its ability to manage risks inherent with such products and clients," the report states.

Similarly, with respect to the capital adequacy ratio for MFIs, the report suggests that where companies have fewer options to raise capital compared with banks, “or exhibit a more pronounced risk profile, a proportionately higher capital adequacy ratio may be warranted".

The report also says that regulators might consider tailoring large exposure limits to the distinctive risks in geographic or sector concentrations often observed in microloan portfolios and across different institutions, “without unduly penalizing otherwise sound practices".