RBI allays PMO concerns on banks' MIcrofinance exposure

‘The pressure of bad loans from the sector not much’.

The recent controversy involving the microfinance sector, resulting in concerns about bank loans turning bad, has made the prime minister’s office (PMO) take stock of the situation. It has asked the Reserve Bank of India (RBI) to submit a status report on the sector and banks’ exposure to the same.

Interestingly, though the finance ministry had briefed PMO regarding bank linkages to microfinance institutions (MFIs), the latter wanted first-hand information.

RBI, however, said that banks’ exposure to the sector was not much and not a matter of great concern. In addition, it said the pressure of bad loans from the sector would not be significant on banks. MFIs raise 75-80 per cent of their funds from banks, 15 per cent from equity and another 10 per cent from other sources like cash securities.

RBI said the recent ordinance of the Andhra Pradesh government had led to a drastic fall in recoveries of MFIs. The Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Ordinance, 2010, which came into effect on October 15, stipulates that MFIs register with the project director of the district rural development agency. It has also banned weekly collections.

Following this, MFIs with most of their business in Andhra Pradesh and doing weekly collections have been the worst affected, with collections dropping to 10 per cent. Also, banks have stopped lending to such MFIs. RBI has also informed PMO that following the problems in the sector, it constituted a committee under Y H Malegam, a senior member on its central board, to study the issues and come out with suggestions to make interest rates charged by MFIs reasonable.

RBI regulates only those MFIs which are registered as non-banking finance companies. These cover more than 80 per cent of the sector. However, in terms of the number of companies, they are a small percentage of the total. RBI does not prescribe lending rates for MFIs.

Earlier this month, the finance ministry wrote to public sector banks, Small Industries Development Bank of India and National Bank for Agriculture and Rural Development, asking for data on their exposure to MFIs, how much was paid back and the amount of non-performing loans.