RBI notifies separate NBFC category for MFIs

The Reserve Bank of India (RBI) today approved creation of a separate category of non-banking financial companies for the Micro Finance Institution (MFI) sector and specified that such institutions need to have a minimum net owned fund of Rs 5 crore.

An RBI-appointed panel headed by YH Malegam had earlier this year recommended setting up of a special category of NBFCs operating in the micro finance sector.

The panel had suggested a minimum net worth of 15 crore for an entity to qualify as an NBFC-MFI.

"It has been decided to create a separate category of NBFCs -- (Non Banking Financial Company-Micro Finance Institution (NBFC-MFI)," the RBI said in a notification.

The RBI in its second quarter policy review in October had approved setting up of this category of specialised financial companies which would cater to low-income groups.

The RBI said for NBFC-MFIs should have a minimum net worth of Rs 5 crore, while for those operating in the North-Eastern states the slab has been kept at Rs 2 crore.

"All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15% of its aggregate qualifying assets," the RBI said.

The RBI has given time till April 1, 2012, to the existing MFIs, whose asset size is less than Rs 100 crore to comply with the capital adequacy requirement of 15%.

Regarding loan disbursal and repayment by such institutions, RBI said that 'Qualifying asset' shall mean loan disbursed to a borrower with a rural household annual income not exceeding Rs 60,000 or urban and semi-urban household income not exceeding Rs 1,20,000.

Also the tenure of the loan not to be less than 24 months for loan amount in excess of Rs 15,000 with prepayment without penalty and the loan has to be extended without collateral.

The RBI has directed the NBFC-MFIs not to resort to any coercive methods and it would be repayable on weekly, fortnightly or monthly installments.

Currently, out of the 300 MFIs in the country, about 70 are regulated by the central bank as NBFCs, accounting for the majority of the loans disbursed by the sector.

As per the norms, NBFC-MFIs can lend to individual borrowers who is not a member of more than one Self help group. Also not more than two NBFC-MFIs should lend to the same borrower.

"All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function," the central bank said.

Battling allegations of high interest rates and coercive tactics used to recover loans, the MFI sector has been facing hard times since October 2010.

Following a spate of farmer suicide, the Andhra Pradesh state government had in November 2010 promulgated an ordinance, putting curbs on MFIs.