Orissa for a holistic legislation on MFIs

At a time when the Micro Finance Institutions (MFIs) are facing the heat due to steep interest rates charged by them, the Orissa government has suggested to the Government of India that a comprehensive regulation needs to be introduced for regulating the activities of such institutions.

The state government feels that the introduction of legislation for the MFIs will go a long way in ensuring transparency in the operations of such institutions and also make them compliant to prudential and ethical norms.

It has argued that presently, there is no regulatory mechanism in place for MFIs except for those registered as Non-Banking Financial Institutions (NBFCs). As a result, the MFIs are not required to follow any prudential norm. Moreover, the management as well as governance structure of MFIs in general is weak.

Further, there are allegations of usurious rates of interest charged by some of the MFIs as well as the crude recovery procedure adopted by them. The state government has pointed out that since the micro-finance sector is not adequately regulated, there is serious apprehension in the mind of the public regarding the operational sustainability and recovery mechanism of the MFIs.

The demand for reforming the MFI legislations has been made in a pre-Budget memorandum submitted by the state government to the Union finance minister Pranab Mukherjee.

It may be noted that the Malegam committee constituted by the Reserve Bank of India (RBI) has recently submitted its recommendations. The committee has recommended that the cap on interest rates of the MFIs needs to be fixed at 24 per cent and also called for doing away with the practice of multiple lending by such institutions.

MFIs operating in Orissa have advanced loans to people worth Rs 1500 crore in the past three to four years, reaching out to more than two million customers in Orissa.

Around 35 MFIs are registered in the state out of which 8-10 are functional, with the recovery rate of these institutions being around 95 per cent.

The loan recovery rate of MFIs in Orissa is as high as 95 per cent. These institutions are giving loans to the people in the range of Rs 5000-Rs 50000 for individual borrowers at an interest rate of 19-25 per cent. Loans are advanced to the people for a period of one year and the customers have the option to repay it either as weekly or monthly installments.

The MFIs are borrowing from commercial banks at the rate of 12-15 per cent and as per the guidelines of the State Level Bankers Committee (SLBC) in Orissa, the MFIs can charge a maximum interest rate of 28 per cent.