Reserve Bank of India (RBI) Deputy Governor Anand Sinha on Monday indicated the central bank was not in favour of allowing micro-finance institutions (MFIs) to take deposits from public. “After all, whatever legislation passes, we have to work with that. But, RBI’s position has been that deposit-taking should be limited to banks,” he told reporters in reply to a question on whether MFIs should be allowed to take small deposits.
The draft Micro Finance Institutions (Development and Regulation) Act, 2011 circulated for public comments by the finance ministry has a provision that allows MFIs to collect small savings from self help groups (SHGs) known as thrift. Finance Minister Pranab Mukherjee in his Budget speech had said the government proposed to introduce the Bill in the ongoing Budget session.
Earlier also the government had introduced a Micro Financial Sector Bill in the Lok Sabha in March 2007. However, it lapsed when the term of the 14th Lok Sabha ended in 2009. Sinha further said MFIs would have to take care of issues like concentration risk, reduction of operational costs and corporate governance to overcome problems of the fledgling industry.
On Basel III norms, the deputy governor said earnings of banks are likely to come under pressure due to the higher capital requirements for the implementation of new global risk mechanism. “There is going to be pressure on banks’ earnings, not only in India but across the world. That’s why, Basel-III implementation has been made longer, so that there will be least disruption,” he said. “However, if you have to do the same activity with significantly higher capital, there will be pressure on return on equity,” he said.
Sinha added the banks would have to increase productivity in order to protect their RoE. Basel-III norms, proposed to be implemented from the beginning of 2013 till 2017, require the equity capital of a bank to be not less than 5.5 per cent of risk-weighted loans, as per the draft guidelines issued by RBI.
“Southern region has seen major concentration of MFIs, both in terms of borrowing and number of clients. I think, they have to go to other regions of the country in order to diversify,” he said.
He further said MFIs must reduce the operational costs for long-term sustainability. The deputy governor said MFIs had to balance between financial and social objectives and maintain appropriate corporate governance for customer protection. The MFIs must measure and disclose performance apart from changing the governance practices, he added.