MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Report Recommends Withdrawal of Priority Sector Status from Microfinance Institutions (MFIs)

An unreleased report by a committee of the Reserve Bank of India (RBI) that was recently leaked to the Indian newspaper Economic Times recommended that RBI withdraw the priority sector status of microfinance institutions (MFIs), which allows MFIs borrow at lower interest rates.

The report suggested that authorities gradually phase-out the status, eventually withdrawing the status completely in March 2012.

An unnamed official at the National Bank for Agriculture and Rural Development (NABARD), a development and supervisory bank in India, “without this status, not only will [private and foreign] banks charge more for these loans [to MFIs], they will also have to find other options for rural lending to offset these loans.” Private and foreign banks have been lending heavily to MFIs to satisfy their priority sector lending targets, a set of mandatory requirements [3] set by RBI aimed at promoting financial inclusion.

As of September 2010, domestic banks and foreign banks operating in India have priority sector lending targets of 40 percent and 32 percent of their net bank credit respectively.

About the National Bank for Agriculture and Rural Development (NABARD) [2]:
The National Bank for Agriculture and Rural Development (NABARD) is a supervisory and development bank in India that formulates the credit and banking policy for the rural sector, supervises and conducts on-site inspections of cooperatives and regional rural banks and promotes the development of microfinance activities in the rural sector. NABARD is charged with the oversight of the Microenterprise Development Programme (MEDP), which focuses exclusively on the development of microenterprises. In 2010, NABARD set a fiscal year target of INR 3,750 billion (USD 80.3 billion) for credit disbursement via commercial banks, state cooperative banks, state cooperative agriculture and rural development banks and other eligible financial institutions up from INR 3,250 billion (USD 69.6 billion) the previous year.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:
[1] Source Article: Economic Times: Microfin cos likely to lose access to cheap funds from banks:

http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/Microfin-cos-likely-to-lose-access-to-cheap-funds-from-banks/articleshow/6516840.cms

[2] MicroCapital Universe: NABARD:
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=National+Bank+for+Agriculture+and+Rural+Development+%28NABARD%29

[3] Reserve Bank of India: FAQs for Priority Sector Lending:

http://rbi.org.in/Scripts/FAQView.aspx?Id=8

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