CAR bar to be raised for micro finance bodies

The government is likely to impose a higher capital adequacy ratio (CAR) on micro financing institutions (MFIs) in the coming budget. The CAR is expected to be higher than that of commercial banks but lower than the 12 per cent imposed on non-banking finance companies (NBFCs).

MFIs are intermediaries extending credit to poor and rural individuals undertaking small businesses.

These institutions borrow funds from banks at 10-11 per cent and lend to rural households at 18 to 24 per cent. Loans vary from Rs 3,000 to Rs 5,000 for small enterprises and between Rs 50,000 and Rs 1 lakh for bigger rural projects.

Today there are a number of micro financing institutions, which are not registered with the Reserve Bank of India (RBI). Registered MFIs need to have a paid-up capital of Rs 2 crore to conduct business.

The Union budget is expected to outline a regulatory framework for MFIs on similar lines as that for NBFCs. The idea is to keep away the numerous small entities.

MFIs met finance minister P Chidambaram late last month, urging him to formulate an independent regulatory framework to curb the entry of fraudulent entities into the system.

MFIs suggested that regulations should be based on the business volumes of individual institutions.

Many large MFIs expressed their willingness to maintain a CAR of about 20 per cent, said senior industry officials.

"In the absence of a regulatory framework the management and governance of MFIs generally remains weak, as there is no compulsion to adopt widely accepted systems, procedures and standards," said a senior MFI official.

Since the sector is unregulated, not much is known about their internal health, he added.

All MFIs will be required to maintain a minimum paid-up capital, which could vary depending upon the size of operations. Further, the government is exploring the option of designating another institution to regulate MFIs.

The only bone of contention is to identify a suitable organisation to handle the regulatory arrangement, said a ministry source.

At present a debate is on whether MFIs should be bought under the RBI fold or to encourage the development of a network of MFIs, which would function as a quasi self-regulatory organisation (SRO).

India has a large number of MFIs varying significantly in size, outreach and credit delivery methodologies. At present, there is no regulatory mechanism in place for MFIs except for those that are registered as NBFCs with the central bank.