Microfinance institutions, or MFIs, can breathe a sigh of relief after the Reserve Bank of India (RBI) on Tuesday said banks’ loans to micro lenders will be eligible for classification as priority sector advances subject to fulfilment of certain conditions.
While the central bank will issue detailed guidelines on regulations of the microfinance sector later, it accepted the broad framework of regulations recommended by the Malegam committee with some modifications.
The Reserve Bank of India (RBI), however, said while loans to microfinance companies could be classified as priority sector advances, it would review the existing norms for such classifications. The central bank will appoint a committee to suggest revised guidelines on priority sector loan classification.
MFIs expect Tuesday’s announcement to improve the flow of bank credit to the cash-strapped sector, which has been battling a crisis of confidence for the past six months.
“We are particularly pleased to see that RBI has re-affirmed priority sector status for microfinance and broadened some of the parameters. The RBI statement brings in regulatory clarity and funding certainty,” S Dilliraj, chief financial officer of SKS Microfinance, the country’s largest micro lender, said.
RBI, in its monetary policy statement for 2011-12, increased the annual income limits for eligible households to Rs 60,000 in rural villages and Rs 1,20,000 in semi-urban centres. The banking regulator said the loan amount to poor borrowers should not exceed Rs 35,000 in the first cycle and Rs 50,000 in subsequent cycles.
“The banks should ensure a margin cap of 12 per cent and an interest rate cap of 26 per cent for their lending to be eligible to be classified as priority sector loans,” the central bank said.
Earlier, the Malegam panel had recommended the margin cap, or the difference between the amount charged to poor borrowers and micro-lenders’ cost of funds, at 10 per cent for large microfinance companies and 12 per cent for small microfinance institutions. The committee had also suggested a cap of 24 per cent on interest rates.
“The interest rate cap is welcome, though the margin cap may restrict efficiency in fund raising. Overall, we welcome enhanced regulation and oversight by RBI on the microfinance industry,” said Spandana Sphoorty Financial, a Hyderabad-based microfinance company, in a statement.
RBI also said outstanding loans of a poor borrower should not exceed Rs 50,000 and the repayment tenure should not be less than 24 months for a loan amount in excess of Rs 15,000 without any pre-payment penalties. Microfinance companies can give loans without collateral and the aggregate amount of loan given for income generation should not be less than 75 per cent of the total advances of the micro lender.
“These limits are well suited to SKS’ current operating model and will enable us to continue to meet the funding requirements of all our 7.2 million members across the country,” Dilliraj said.
RBI has allowed microfinance companies to extend loans to individuals outside the self-help groups and joint liability committees. The borrower will decide if the loans will be repaid in weekly, fortnightly or monthly installments.
“This is a point, which we have been making for some time now. The decision on the time of repayment lies with the borrower and not with any state governments,” said Vijay Mahajan, president of Microfinance Institutions Network.
He added that microfinance institutions would now be able to offer specialised loan products like providing loans for house repair, vocational training as they were allowed to lend outside the self-help groups.
