Faced with an acute liquidity crunch, the Union Budget has brought little cheer to microfinance institutions (MFIs). However, MFIs have welcomed the recognition of their role in financial inclusion by Finance Minister Pranab Mukherjee.
While announcing the creation of a Rs 100-crore “India Microfinance Equity Fund”, the finance minister hinted at a framework to protect the interest of small borrowers.
“The committee set up by the Reserve Bank of India to look into issues relating to the microfinance sector in India has submitted its report. The Government is considering putting in place appropriate framework to protect the interests of small borrowers,” said Mukherjee.
The Malegam committee has enhanced provision requirements for MFIs, entailing that Rs 5,000 crore to Rs 6,000 crore has to be provided by June or July for bad loans in Andhra Pradesh.
“It is quite disappointing because the Rs 100-crore equity fund is nothing compared to what the sector has lost in Andhra Pradesh. The MFIs need to raise Rs 5,000 crore in the next six months (to meet the recommendation of the Malegam committee report,” said Vijay Mahajan, founder of Basix and chairman of MFIs’ representative body Microfinance Institutions Network.
The MFI sector is reeling under the Andhra Pradesh MFI (Regulation of Money Lending) Act, which severely curbed operations of microfinance institutions in the state, putting restrictions on recovery. The state has the largest concentration of MFIs in the country.
The Malegam panel had earlier suggested putting a cap on lending rates at 24 per cent and a loan amount of not more than Rs 25,000 crore to single borrower by MFIs. Mahajan said there was a need for proper legislation to stop state governments from enacting own laws on MFIs.
