Cap interest rate on MFI loans at 24%: Malegam panel

Aimed at reviving the crisis-ridden micro finance sector, a RBI committee Monday suggested that MFIs be allowed to charge a maximum interest of 24 percent on small loans which cannot exceed Rs 25,000.

Mumbai: Aimed at reviving the crisis-ridden micro finance sector, a RBI committee Wednesday suggested that MFIs be allowed to charge a maximum interest of 24 percent on small loans which cannot exceed Rs 25,000.

The committee, headed by Reserve Bank's central board director YH Malegam, also pitched for creation of a separate category of non-banking financial companies (NBFC-MFI) for the micro finance sector.

The panel also said small loans of up to Rs 25,000 could be given to families having an income up to Rs 50,000 per annum. On repayment, it said, the borrowers be given the option of weekly or fortnightly or monthly return of the loan.

It further said at least 75 percent of loans extended by micro finance institutions (MFIs) should be for income generation purposes. It further recommended that a borrower cannot take loans from more than two MFIs.

These recommendations, the committee said, should be implemented from April 1, 2011.

Industry body Microfinance Institution Network (MFIN) termed the recommendations as balanced. MFIN CEO Alok Prasad said, "It gives clarity to the industry requirements. The recommendations have been long demand of the industry."

On interest rate ceiling, he said, the micro finance industry is already moving in that direction, so it is nothing new.

RBI constituted the committee in October last year in the wake of allegations of overcharging and use coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh.

The decisions taken by the state government to regulate MFIs slowed down loan recovery process hitting the financial health of the sector. It was further aggravated by the reluctance of banks to support MFIs.

To deal with the problem, RBI earlier in the day relaxed provisioning norms to enable banks to continue lending to the cash-strapped MFIs.

About the regulations of MFIs, the Malegam Committee, suggested that it should be done by the National Bank for Agriculture and Rural Development (NABARD) in close coordination with the Reserve Bank of India (RBI).

If the recommendations are accepted, the committee said, a separate law enacted by Andhra Pradesh government would not be needed.

With regard to NBFC-MFIs, the committee suggested that they should have a minimum networth of Rs 15 crore.

The other members of the panel include industrialist Kumar Mangalam Birla, RBI central board member UR Rao and RBI deputy governor KC Chakrabarty.

PTI

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