RBI mulls new category to regulate more MFIs

The Reserve Bank of India (RBI) is likely to create a separate category in the non-banking finance company (NBFC) space to include more microfinance institutions (MFIs) for regulation.

The central bank’s proposal to create the NBFC-MFI category comes on the back of recommendations made by a committee headed by Y H Malegam that MFIs operating with a profit motive should be brought under the purview of RBI. Malegam is on the board of RBI.

The committee was set up by the banking regulator in October to look into various issues related to MFIs, including the interest rates charged from borrowers and practices used by them for recovering loans.

At present, RBI regulates those MFIs which are registered as NBFCs. Although the registered companies cover over 80 per cent of the microfinance business, in terms of number of companies they constitute a small percentage of the total number of MFIs in the country.

Parameters such as maximum exposure, net worth and minimum capital requirements will be prescribed for those entities. The committee will define which institutions can be termed as MFIs and what constitutes micro credit.

Sources said, as recommended by the Malegam panel, the regulator would bring about regulations for the new category which would prohibit all in it from resorting to coercive recovery practices.

In addition, the committee has recommended the regulator cap the interest rate charged by MFIs. At present, the rates charged by MFIs go as high as 32 per cent.

However, bank loans to MFIs, classified as priority sector lending, would continue, a banking industry source said. “Taking away the priority sector status will make loans costly for MFIs, which can make the business model unviable,” he said. MFIs raise about 75 per cent of their borrowings from banks, 15 per cent from equity and another 10 per cent from other sources like cash securities.

Though NBFCs come under the non-banking supervision department (NBSD) of the central bank, it is not clear whether the NBFC-MFI category will be with NBSD or the rural planning and credit department.

The Malegam committee which was constituted in October had Shashi Rajagopalan, U R Rao, Kumar Mangalam Birla and K C Chakrabarty, deputy governor of RBI as members. V K Sharma, an executive director of RBI is the member secretary of the committee.