Banks are still not lending to MFIs, says K C Chakrabarty

Banks have not yet started offering fresh loans to microfinance institutions (MFIs), which are currently battling a crisis of confidence and need additional funds.

“On the ground level, banks are not lending to MFIs. In our discussion with banks, they had promised once the guidelines (on regulating microfinance sector) are finalised, they would give out loans. However, they are yet to start lending,”

K C Chakrabarty, deputy governor, Reserve Bank of India (RBI), told reporters on the sidelines of a conference organised by Skoch Consultancy Services.

Banks had curbed lending to microfinance companies last year after a crackdown by the Andhra Pradesh government. The crackdown followed allegations of micro lenders charging high interest rates to poor borrowers and resorting to coercive recovery practices. A steep decline was reported in MFI loan recoveries in Andhra Pradesh, which, at that time, accounted for nearly one-third of the sector's business in India. Microfinance companies claimed the Andhra Pradesh government's actions had eroded their profits and many of them restructured their debts with banks.

RBI had set up a committee under the chairmanship of board member Y H Malegam to sort out the uncertainties over regulation of the microfinance sector. Chakrabarty said RBI was drafting the guidelines based on the Malegam committee recommendations. “(About) 90 per cent of the core recommendations of the Malegam committee have been accepted...There would be no surprises in the norms, as RBI has broadly accepted the recommendations. There may be some tweaking, but no surprises,” Chakrabarty said.

However, he said the interest rate cap on MFI loans, for these to be classified under priority sector lending, would not be fixed and would depend on the overall interest rate environment. For MFI loans to be considered as priority sector advances, the interest rates on them are proposed to be capped at 26 per cent.

“Earlier, the base rates (of most banks) stood at eight per cent. Now, base rates have increased to 10 per cent. So, why should there be a fixed rate at which MFIs would lend? It is only a framework, it can move with the market conditions and economic environment. If interest rates come down, the cap can definitely be brought down,” Chakrabarty said.