MICROCAPITAL BRIEF: Malegam Proposals on Indian Microfinance Likely To Be Ratified on April 1, Bankers Defend MFIs’ Priority Sector Status

On April 1, 2011, the Reserve Bank of India (RBI) is expected to ratify some of the recommendations put forth by the Malegam Committee, headed by central bank director Y H Malegam, to amend the regulation of the Indian microfinance sector [1]. The revised regulations will impose caps that include an annual interest rate ceiling of 24 percent, a loan size of INR 25,000 (USD 555) per person, and no more than two loans per individual [2]. Although Indian bankers have generally conceded to the regulations, they have met with RBI deputy governor Mr K C Chakrabarty to express their concern that the microfinance institutions’ (MFIs’) priority sector status might be cancelled should MFIs engage in “continued” misconduct, such as coercive loan collection practices and excessively high interest rate charges. Priority sector status allows banks to count lending to MFIs towards government-mandated quotas intended to foster financial inclusion.

By Jacqueline Foelster, Research Associate

About the Reserve Bank of India (RBI): Established in 1935, the Reserve Bank of India 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, RBI reduced its stake in NABARD from 72.5 percent to 1 percent in October 2010.

About Indian Banks Association (IBA): Established in 1946, the Indian Banks Association (IBA) is a trade association for private banks in India. The mission of IBA is to promote best practices in the banking sector and represent the industry to the Indian regulatory authorities. Headquartered in Mumbai, IBA has about 160 members with 19 domestic offices and an office in New York City as of 2011.

Sources and Additional Resources

[1] Indian Express, “Malegam proposals on MFIs likely to be implemented soon”, http://www.indianexpress.com/news/Malegam-proposals-on-MFIs-likely-to-be-implemented-soon/764040/

[2] MicroCapital.org Brief, March 23, 2011, “Bankers Urge Reserve Bank of India’s (RBI’s) Malegam Committee to Maintain Priority Status for Microfinance Sector”, https://www.microcapital.org/microcapital-brief-bankers-urge-reserve-bank-of-india%E2%80%99s-rbi%E2%80%99s-malegam-committee-to-maintain-priority-status-for-microfinance-sector/

MicroCapital.org Brief, March 15, 2011, “Federal Microfinance Bill May Replace Existing State Microfinance Legislation in India”, https://www.microcapital.org/microcapital-brief-federal-microfinance-bill-may-replace-existing-state-microfinance-legislation-in-india/

MicroCapital.org Brief, February 8, 2011, “Reserve Bank of India (RBI) Relaxes Rules in Effort to Ease Microfinance Institution (MFI) Liquidity Crunch”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-relaxes-rules-in-effort-to-ease-microfinance-institution-mfi-liquidity-crunch/

MicroCapital.org Brief, 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 Universe Profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

MicroCapital Universe Profile: Indian Banks Association (IBA), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Indian+Banks+Association+%28IBA%29

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

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