RBI not in favour of allowing MFIs to take deposits: Sinha

Says MFIs will have to take care of issues like concentration risk, reduction of operational costs and corporate governance

RBI Deputy Governor Anand Sinha today indicated the central bank was not in favour of allowing micro-finance institution (MFIs) to take deposits from public.

"After all, whatever legislation passes, we have to work with that. But, RBI's position has been that deposit-taking should be limited to banks," he told reporters in reply to a question on whether MFIs should be allowed to take small deposits.

The draft Micro Finance Institutions (Development and Regulation) Act, 2011 circulated for public comments by the Finance Ministry has a provision that allows MFIs to collect small savings from Self Help Groups (SHGs) known as thrift.

Finance Minister Pranab Mukherjee in his Budget speech had said the government proposed to introduce the Bill in the ongoing Budget Session.

Earlier also the government had introduced a Micro Financial Sector Bill in the Lower House of Parliament in March, 2007. However, it lapsed when the term of the 14th Lok Sabha ended in 2009.

Sinha further said that MFIs will have to take care of issues like concentration risk, reduction of operational costs and corporate governance to overcome problems of the fledgling industry.

"Southern region has seen major concentration of MFIs, both in terms of borrowing and number of clients. I think, they have to go to other regions of the country in order to diversify," he said.

He further said that MFIs must reduce the operational costs for long-term sustainability.

The Deputy Governor said MFIs have to balance between financial and social objectives and maintain appropriate corporate governance for customer protection.

The MFIs must measure and disclose performance apart from changing the governance practices, he added.

On Basel III norms, the deputy governor said earnings of banks are likely to come under pressure due to the higher capital requirements for the implementation of new global risk mechanism.

"There is going to be pressure on banks' earnings, not only in India but across the world. That's why, Basel-III implementation has been made longer, so that there will be least disruption," he said.

"However, if you have to do the same activity with significantly higher capital, there will be pressure on return on equity [RoE]," he said adding the banks would have to increase productivity in order to protect their RoE.

Basel-III norms, proposed to be implemented from the beginning of 2013 till 2017, require the equity capital of a bank to be not less than 5.5% of risk-weighted loans, as per the draft guidelines issued by RBI.