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Banks urge RBI to retain priority status for MFIs

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Will ensure due diligence while extending loans, lenders affirm.

Banks have urged the Reserve Bank of India (RBI) against withdrawing the priority sector status for loans extended to microfinance institutions (MFIs).

“Our main reservation is that nothing should happen which could result in the withdrawal of priority sector status,” said K Ramakrishnan, chief executive officer of the Indian Banks’ Association (IBA).

“Banks will always analyse, assess and conduct the required due diligence before giving loans to MFIs. However, if the latter don’t follow the regulations, banks should not be penalised. This was the main concern raised in today’s meeting,” he added.

Top bank officials met deputy governor on Thursday to give feedback on Malegam committee’s recommendations on the MFI sector.

MFIs, which mostly lend to poor people in rural areas, have witnessed heightened regulatory scrutiny over the past few months. This followed reports that they charged high interest rates and adopted coercive recovery practices.

This prompted the central bank to set up a panel under its board member to look into the operations of these firms. Apart from suggesting that RBI regulate the sector, it recommended the creation of a separate category for among the non-banking finance company (NBFC) category.

The findings and recommendations of the committee were made public on January 19. Based on the feedback received from bankers and other stakeholders, RBI will come up with guidelines to regulate the sector.

Bankers hinted that RBI may implement some recommendations from April 1.

“The committee’s recommendations will be applicable from April 1. The loans which have been already given to MFIs will not be governed by these regulations,” said Aditya Puri, managing director of HDFC Bank.

A similar view was echoed by Dena Bank’s chairman and managing director DL Rawal, who said the proposed norms would only regulate MFI loans sanctioned April onwards.

It was not clear if the proposed norms will include all the recommendations. However, bankers said the suggestions on interest rate cap and loan exposure of MFIs to a single borrower were likely to be implemented from next month.

The committee has recommended that MFIs’ lending rates be capped at 24 per cent. It suggested the total outstanding loans to a single borrower should not exceed Rs 25,000. Also, borrowers could not have an annual household income more than Rs 50,000.

Bankers also noted that RBI was unlikely to persuade the Andhra Pradesh government to withdraw its legislation on regulating MFIs.

“RBI said it didn’t have any control on state-level legislation. However, the view is if good things are done here, the legislation could be withdrawn by the state on its own,” IBA’s Ramakrishnan said.

In Andhra Pradesh, which accounts for nearly one-third of microfinance business in India, the state government has introduced a new law to regulate MFIs.

However, these firms complain the new law has affected their loan disbursals and recoveries in the state, thus deteriorating profitability.

“RBI cannot do anything on states’ legislation. However, if RBI does become the regulator, states will not feel the need to regulate MFIs individually,” HDFC Bank’s Puri said.

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