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Business News/ Politics / Policy/  Malegam to head RBI panel on microfinance

Financial sector expert Y.H. Malegam will head a Reserve Bank of India (RBI) panel to look into the functioning of microfinance institutions or MFIs and their regulations. The MFIs are in the business of giving tiny loans.

Kumar Mangalam Birla, Shashi Rajagopalan and U.R. Rao – all on the boards of the Indian central bank – and RBI deputy governor K.C. Chakrabarty are the members of the panel.

The committee, which will submit its report in three months, will discuss critical issues that have been affecting the sector, ranging from high interest rates to the strong-arm methods used by such firms to recover loans.

“There have been some concerns expressed in the media about high interest rates, coercive recovery processes and multiple lending practised by some microfinance institutions," an RBI release said.

The committee will “study the issues and concerns in this sector, including ways and means of making interest rates charged by them reasonable."

Currently, the top MFIs, around 20 of them, operate as non-banking finance companies and are regulated by RBI. The remaining around 800 MFIs are outside the regulator’s purview. In terms of volume of business, the top 20 MFIs control about 80% of business.

“Although the registered companies cover over 80% of the microfinance business, in terms of 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," the RBI said.

The central bank constituted the committee shortly after Andhra Pradesh government approved an ordinance to regulate the MFI operations, after nearly 30 deaths in a span of one and a half months reportedly due to the harassment by MFIs, PTI reported last week quoting official sources. According to the ordinance, MFIs should specify the area of their operations, the rate of interest, the system of operation and recovery to the government authorities.

The RBI committee will meet the government representatives of Andhra Pradesh as well as other states before finalizing their report.

Recently, the finance ministry has written to state-run banks asking them to ensure that the “large and well established" MFIs should charge 22-24% to their clients and smaller MFIs must prepare a road map to bring down their interest rates.

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Updated: 27 Jan 2011, 08:27 PM IST
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