RBI panel proposes 24% cap on MFI interest rates

Aimed at reviving the crisis-ridden microfinance sector, a committee appointed by Reserve Bank of India (RBI) today suggested that MFIs be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs 25,000.

The committee, headed by RBI's central board director Y H Malegam, also pitched for creation of a separate category of non-banking financial companies (NBFC-MFI) for the microfinance sector.

The panel also said small loans of up to Rs 25,000 could be given to families having an income up to Rs 50,000 per annum. On repayment, it said, the borrowers be given the option of weekly or fortnightly or monthly return of the loan.

It further said at least 75 per cent of loans extended by microfinance institutions (MFIs) should be for income generation purposes. It further recommended that a borrower cannot take loans from more than two MFIs.

These recommendations, the committee said, should be implemented from April 1, 2011.

Industry body Microfinance Institution Network (MFIN) termed the recommendations as balanced. MFIN CEO Alok Prasad said: "It gives clarity to the industry requirements. The recommendations have been long demand of the industry."

On interest rate ceiling, he said, the micro finance industry is already moving in that direction, so it is nothing new.

The RBI constituted the committee in October last year in the wake of allegations of overcharging and use coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh.

The decisions taken by the state government to regulate MFIs slowed down loan recovery process hitting the financial health of the sector. It was further aggravated by the reluctance of banks to support MFIs.

To deal with the problem, RBI earlier in the day relaxed provisioning norms to enable banks to continue lending to the cash-strapped MFIs.

About the regulations of MFIs, the Malegam Committee, suggested that it should be done by the National Bank for Agriculture and Rural Development (Nabard) in close coordination with the RBI.

If the recommendations are accepted, the committee said, a separate law enacted by Andhra Pradesh government would not be needed.

With regard to NBFC-MFIs, the committee suggested that they should have a minimum networth of Rs 15 crore.

The other members of the panel include industrialist Kumar Mangalam Birla, RBI central board member U R Rao and RBI deputy governor K C Chakrabarty.