MFIs: Relax malegam proposals

Ahead of Reserve Bank of India’s (RBI) review of monetary policy on May 3, the microfinance industry has sought relaxations in the recommendations of the Malegam committee. Industry players have asked for relief in provisioning norms and relaxation in the eligibility for both families and individual borrowers to qualify for microfinance institution (MFI) loans

The industry expects RBI’s nod to the recommendations of the Malegam committee report, as part of its monetary policy statement on May 3.

After the Andhra Pradesh government, through an ordinance in October, restricted fresh lending and borrowing by MFIs, RBI had appointed a committee, chaired by Y H Malegam, a member on RBI’s central board of directors, to study the sector.

In a recent meeting with RBI deputy governors KC Chakrabarty and Shyamala Gopinath, various representative bodies of the MFI sector had expressed apprehensions in accepting the recommendations in their current form. At the meeting, MFIs had said provisioning should be spread over two years, rather than the committee’s recommendation of 180 days.

The Malegam committee had suggested MFIs maintain an aggregate provision at 50 per cent of the aggregate loan installments overdue by a period of 90-180 days. The had also suggested 100 per cent provisioning for loan installments overdue by 180 days or more. Thus, of non-recovered dues in Andhra Pradesh, worth Rs 7,500 crore, Rs 5,000-Rs 6,000 crore had to be provided for by June or July. The panel also said MFIs should maintain a capital adequacy ratio of 15 per cent.

If the committee’s recommendations are implemented, many small and medium MFIs would be left with negative net worth, said Alok Prasad, chief executive officer, Microfinance Institutions Network, a representative body of various MFIs.

The committee also suggested MFI loans be provided only to families with annual income of less than Rs 50,000 and to individual borrowers with an annual income of not more than Rs 25,000. MFIs, however, said family income limit for MFI loans should be raised to at least Rs 75,000. They said the annual income eligibility for individual borrowers should also be raised.

“We had three suggestions in the meeting. First, the recommendations should have a perspective effect, rather than a retrospective one. Second, they should be based on the principle of transition of time, since we need to reorient our field staff. Third, initially the implementation of the rules should be based on self declaration, since there is no formal proof of income among MFI borrowers,” said Dilli Raj, chief financial officer, SKS Microfinance.

The RBI report had also recommended an average ‘margin cap’ of 10 per cent for MFIs with a loan portfolio of Rs 100 crore and 12 per cent for smaller MFIs, along with a cap of 24 per cent for interest on individual loans. It also said to increase transparency, an MFI should levy only three charges —- processing fee, interest and an insurance charge.