Bank loan to MFIs is priority sector lending: RBI

The Reserve Bank today said that loans extended by banks to micro-finance institutions (MFIs) from April 1 onward will be classified as priority sector lending.

"Bank loans to all MFIs, including NBFCs working as MFIs on or after April 1, 2011, will be eligible for classification as priority sector loans if, and only if, they conform to the regulations formulated by the Reserve Bank," RBI Governor D Subbarao said in the 'Monetary Policy Statement for FY12'.

The RBI has also decided to appoint a committee to review the priority sector lending classification, Subbarao said, adding that the recommendations made by the Malegam Committee for the micro-finance sector have been broadly accepted.

As per the RBI norms, banks are required to lend 40% of their adjusted net credit to the priority sector, which includes agriculture, small-scale industries and other poor sections.

In January, an RBI Committee headed by YH Malegam had recommended that interest rates on loans extended by MFIs should be capped at 24% and individual loans should not exceed Rs 25,000.

The MFIs were allegedly charging a high interest rate of over 30%.

"The Reserve Bank has broadly accepted the framework of regulations recommended by the Malegam Committee. We have, however, adjusted some of the parameters recommended by the committee," Subbarao said.

The panel has also suggested that 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 should be given the option of weekly or fortnightly or monthly return of the loan.

It has said the recommendations should be implemented from April 1, 2011, for the benefit of the sector.

The panel also said at least 75% of loans extended by MFIs should be for income generation purposes. It further recommended that a borrower cannot take loans from more than two MFIs.

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

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