Reserve Bank of India (RBI) Deputy Governor Mr H R Khan has announced that Indian microfinance institutions (MFIs) will now be allowed to execute external commercial borrowings (ECB)–those that are raised from outside India–of up to USD 10 million per financial year, twice as much as was previously allowed [1]. Such funds must be “utilised for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building.” [2] The change is intended to address liquidity issues in the industry [1].
However, industry experts reportedly say that the volatility of the rupee make it more difficult for MFIs to raise money from overseas. Regulations passed in October 2010 in the state of Andhra Pradesh also make it more difficult for MFIs to attract foreign investors. Ramesh Ramanathan, chairman of Bangalore-based MFI Janalakshmi, was quoted as having said “Increasing the credit limit through ECB window is definitely a good step by the RBI. However, one can’t see it in isolation. Without the sophistication of dealing with a volatile currency, MFIs will not able to raise money at now”.
By Kristha Abores, 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 (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.
About Janalakshmi Financial Services (JFS): Janalakshmi Financial Services (JFS) is a microfinance institution (MFI) located in India. It is focused primarily on offering loans, savings and microinsurance in urban areas. As of March 31, 2011, JFS reported to the US-based nonprofit Microfinance Information Exchange (MIX) total assets of USD 43.7 million, a gross loan portfolio of USD 40.8 million, 193,000 active borrowers, return on assets (ROA) of -1.38 percent and return on equity (ROE) of -4.83 percent.
Sources and Additional Resources:
[1] “Micro-finance institutions will be allowed ECB limit of up to $10 m,” http://www.thehindubusinessline.com/industry-and-economy/banking/article…
[2] “ECB for MFIs and NGOs engaged in micro finance activities under Automatic Route,” http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6876&Mode=0
[3] “Rupee, domestic issues to act as spoilers for MFIs’ ECB plans,” http://profit.ndtv.com/News/Article/rupee-domestic-issues-to-act-as-spoi…
MicroCapital.org article, July 7, 2011, “MICROCAPITAL BRIEF: Indian Microfinance Institutions (MFIs) May Become Business Correspondents (BCs) for Commercial Banks,” https://www.microcapital.org/microcapital-brief-indian-microfinance-insti…
MicroCapital.org article, June 23, 2011, “MICROCAPITAL BRIEF: Spurned by Commercial Banks, Indian Microfinance Institutions (MFIs) Raise Funds from Social Investors IFC, ACCION, MicroVest, ShoreCap, Aavishkaar, BlueOrchard,” https://www.microcapital.org/microcapital-brief-spurned-by-commercial-ban…
MicroCapital.org article, November 15, 2010, “MICROCAPITAL BRIEF: 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/
MicroCapital Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Res…
MicroCapital Universe Profile: Janalakshmi Financial Services (JFS), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Jan…
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
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