Some Malegam proposals may apply from April 1

Recommendations include 24% cap on lending rates for MFCs

The Reserve Bank of India (RBI) may implement some recommendations made by the Malegam committee on regulating the microfinance sector in India from April 1, a senior central bank official said today.

“First, we have to take a decision on which recommendations are to be implemented. At present we are in a discussion process. It will come only after April 1,” Deputy Governor

K C Chakrabarty told reporters on the sidelines of a conference here today.

“Some will be applicable, some may not be. For instance, customer protection, ombudsman — these are areas where it will take more time. So far as (how) they must do their business, interest rate, etc (recommendations on), these may be applicable from April 1.”

He was clear that no decision had been taken on any of Malegam’s recommendations. “We have to discuss first. Should we put a cap (on lending rates) at 24 per cent, those are issues to be decided,” he said.

Nor did he say by when this would happen, though he did say, as noted, that some could be implemented from April 1.

“First, recommendations have to be accepted. Then we have to work out a sequence, how these will go, when will be the date. We don’t give any future guidance,” Chakrabarty said.

India’s microfinance companies (MFCs), which mostly lend to poor people in rural areas, have witnessed heightened regulatory scrutiny in recent months, following reports that they charge high rates of interest from borrowers and use coercive methods to recover loans. In Andhra Pradesh, which accounts for nearly one-third of the sector’s business in India, the state government has introduced a new law to curb such alleged malpractices. Microfinance institutions say the new law has affected their loan disbursals and recoveries in the state.

A committee headed by RBI board member Yezdi H Malegam was set up to look into the operations of MFCs. It recommended a 24 per cent cap on lending rates and that total loans of MFCs to a single borrower should not exceed Rs 25,000. Also, a borrower’s annual household income shouldn’t exceed Rs 50,000. The panel also says MFCs need to maintain a 15 per cent capital adequacy ratio. It also made recommendations on enhancing the provisions on assets and putting a cap on micro lenders’ profit margins.