Sidbi, a major lender to MFIs, also under the scanner for violation of RBI guidelines.
The Andhra Pradesh government has asked the Reserve Bank of India (RBI) to investigate whether banks had adhered to its guidelines on microcredit while lending to microfinance institutions (MFIs).
The state government also asked it to probe the role of Small Industries Development Bank of India (Sidbi), an independent financial institution set up in 1990 to aid the growth and development of micro, small and medium-scale enterprises. Sidbi is a major lender to MFIs.
“There is prima facie evidence that some banks violated RBI guidelines while giving loans to MFIs,’’ R Subrahmanyam, rural development principal secretary, told Business Standard.
According to a circular by RBI, microcredit constitutes credit and financial services and products of small amounts not exceeding Rs 50,000 per borrower; either directly or indirectly through a self-help group, joint liability group, non-banking financial company or an MFI for on-lending.
Microcredit should enable the poor to raise their income levels and improve their living standards, said the circular. It also pointed out that despite the vast expansion of formal credit system, the dependence of the marginalised section on money lenders continued in many areas, especially during emergencies.
Citing a joint fact-finding study on microfinance by RBI and major banks, the circular observed some MFIs financed by banks or acting as their intermediaries or partners appeared to be focusing on relatively better banked areas, including areas covered by the SHG (self-help group)-Bank linkage programme. Competing MFIs were operating in the same area and trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households, it argued.
Also, many MFIs supported by banks are not engaging themselves in capacity-building and empowerment, according to the circular. It said MFIs were disbursing loans to newly-formed groups within 10-15 days of their formation, in contrast to the SHG-bank linkage programme, which took six to seven months for group formation, nurturing and handholding. As a result, cohesiveness and a sense of purpose are not developing in the groups formed by these MFIs.
As the principal financier to MFIs, banks do not appear to be engaging these groups with their systems, practices and lending policies.
In many cases, no review of MFIs’ operations was undertaken after sanctioning the credit facility. These findings were brought to the notice of the banks to enable them take necessary corrective action, the circular said.
“The situation in the state would not have been so grave had the banks adhered to the RBI guidelines,’’ said Subrahmanyam, adding that it would not be possible to identify the banks at this point.
Andhra Pradesh witnessed a spate of incidents in the recent past, wherein several borrowers committed suicide or suffered harassment by the recovery agents of MFIs. Following this, the state introduced the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance 2010 last month.
