The Reserve Bank of India (RBI), India’s central banking authority, has temporarily relaxed asset classification rules for bank loans to the microfinance sector, allowing commercial banks to classify loans made to microfinance institutions (MFIs) as standard assets. Under the standard guidelines, banks had to classify loans made to MFIs as unsecured assets, which required a higher minimum provision than do standard assets [1]. The change encourages commercial banks to continue lending to the Indian microfinance industry, which has been constrained by a drying out of funds from commercial banks largely due to a sharp drop in microborrower repayment rates, primarily in the Indian state of Andhra Pradesh.
The relaxation of the classification of assets complements a series of other recommended measures – including the permission for banks to form consortiums to decide on how to resume lending to microfinance companies – that were put forth in a report published by the Malegam Committee headed by Y H Malegam, central board director of the RBI, to regulate the Indian microfinance industry [2].
By: Jacqueline Foelster, Research Associate
About Reserve Bank of India (RBI): Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. RBI consists of twenty-two regional offices.
Sources and Resources:
[1] Reserve Bank of India. “Credit Support to Micro Finance Institutions (MFIs)”, http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6227&Mode=0
[2] Reserve Bank of India. “Report of the Sub-Committee of the Central Board of Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector”, http://indiamicrofinance.com/wp-content/uploads/2011/01/Malegam-Report-Issues-Microfinance-India.pdf
MicroCapital’s Microfinance Universe Profile: Reserve Bank of India (RBI)
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
MicroCapital.org Article, January 26, 2011: “Reserve Bank of India (RBI) Subcommittee Proposes Regulation for Microfinance Institutions (MFI), https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-subcommittee-proposes-regulation-for-microfinance-institutions-mfi/
MicroCapital.org Article, November 15, 2010: “India’s Microfinance Industry on Brink of “Collapse” Due to Credit Freeze in State of Andhra Pradesh”, https://www.microcapital.org/microcapital-brief-indias-microfinance-industry-on-brink-of-collapse-due-to-credit-freeze-in-state-of-andhra-pradesh/
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
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