Bankers in India recently met with the Reserve Bank of India’s (RBI’s) Malegam Committee, headed by central bank director Y H Malegam, to discuss the work of the committee and to urge RBI to maintain the sector’s priority status. Priority sector status allows banks to count lending to microfinance institutions (MFIs) towards government-mandated quotas, which results in lower interest rates charged to MFIs. K Ramakrishnan, chief executive of the Indian Banks Association argued that the microfinance sector as a whole should not be penalized as a result of the misconduct of some MFIs. While the bankers maintained that the flow of funding to the sector should remain a top priority, they conceded to regulatory caps that include a maximum loan size of INR 25,000 (USD 555) per person, an annual interest rate ceiling of 24 percent and no more than two loans per individual. The bankers also voiced support for having a single regulator for both the general banking and microfinance sectors.
By Julie Moksim, Research Associate
About the Reserve Bank of India (RBI): Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI has since largely divested from NABARD. RBI consists of twenty-two regional offices as of March 2011.
Sources and Additional Resources:
The Financial Express: “Bankers Favor Priority Tag for Microfinance Lenders”, March 19, 2011, http://www.financialexpress.com/news/bankers-favour-priority-tag-for-mic…
MicroCapital.org Brief, January 26, 2011: Reserve Bank of India (RBI) Subcommittee Proposes Regulation for Microfinance Institutions (MFI), https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi…
MicroCapital.org Brief, November 16, 2010: Under Pressure From State Government of Andhra Pradesh, Indian Microfinance Institutions Agree to Cap Interest Rates at 24%, https://www.microcapital.org/microcapital-brief-under-pressure-from-state…
MicroCapital’s Microfinance Universe Profile: Reserve Bank of India (RBI)
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Res…
Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/
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