RBI panel to probe recovery mechanism of MFIs

A sub-committee appointed by the Reserve Bank of India (RBI) will examine recovery mechanism of microfinance institutions (MFIs) and their interest rate practices, amid criticism of these lenders charging exorbitant loans rates and using strong arm tactics for recovery.

"To examine the prevalent practices of MFIs regarding interest rates, lending and recovery practices, to identify trends that impinge on borrowers' interest," the RBI said in a notification.

Earlier this month, the RBI had appointed a sub-panel, under the Chairmanship of Y H Malegam, to look into the functioning of MFIs. The committee will submit its report in three months.

The RBI will examine the conditions under which loans to MFIs could be classified as priority sector lending and give appropriate recommendations.

Currently, MFIs charge up to 34 per cent interest rate per year on loans.

At present, RBI regulates only those MFIs which are registered with it as non-banking finance companies. Others are regulated by sectoral norms under which these MFIs fall.

Although the companies registered with RBI cover over 80 per cent of the microfinance business, in terms of numbers of MFI, they constitute only a small percentage.

The Finance Ministry is preparing a bill on regulating MFIs and has finished consultations with stakeholders to table the bill in the winter session.

But this has been delayed now, since the whole issue came under a lot of controversy after a number of suicide cases were reported in Andhra Pradesh, allegedly due to coercive methods adopted by these lenders to recover their money from poor borrowers.

This prompted the state to promulgate an ordinance to rein in MFIs and the RBI to constitute a sub-committee to look into the functioning of these lenders.

The RBI said that the sub-committee would "examine and make appropriate recommendations regarding the applicability of money lending legislation of the states and other laws to NBFCs/ MFIs".

The sub-committee would also detail out "the objectives and scope of regulations of NBFCs undertaking microfinance by the RBI and the regulatory framework needed to achieve those objectives", the RBI said.