MICROCAPITAL BRIEF: Malegam Committee Report on Microfinance Regulation in India Fails to Meet Expectations, Argues Sriram

On the website “livemint.com”, an Indian partner of the US-based Wall Street Journal, independent researcher MS Sriram presented his evaluation of the recommendations issued in response to the crisis in the microfinance sector in Andhra Pradesh by the Malegam Committee of the Reserve Bank of India (RBI). While he argues that the report has some positive aspects, he states that it largely fails to deliver.

Mr Sriram is in favor of the recommendations that RBI should continue to engage with industry associations; the need to maintain priority sector status for the microcredit business; the need to keep microfinance institutions (MFIs) out of the Moneylenders Act; and that RBI maintain regulatory and supervisory control of the microfinance sector, as opposed to the state governments.

Mr Sriram views as too restrictive several recommendations of the committee such as the interest rate cap of 24 percent for MFIs, the upper limit imposed on annual household income of INR 50,000 (USD 1,090) to be eligible for an MFI loan and the maximum size of individual loans being set at INR 25,000 (USD 548). He also states that that the cap of 10 percent on MFI’s markup over their borrowing cost fails to incentivize MFIs to achieve efficiency.

Mr Sriram concludes that, while the recommendations proposed by the committee were meant to safeguard the interests of the poor, they are marked by over-regulation and thus overly limit choices for the poor.

By: Medha Ravi, Research Associate

About Reserve Bank of India (RBI):
Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. RBI consists of twenty-two regional offices.

Source and Resources:

livemint.com, Wall Street Journal: “Microfinance: Misunderstood, Malegamed”, http://www.livemint.com/2011/01/20232223/Microfinance-misunderstood-M.html?d=1#

MicroCapital.org story, February 15, 2011: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Proposal A Positive Step, Argues Tripathi… But Andhra Pradesh Government Oversteps”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-proposal-a-positive-step-argues-tripathi%E2%80%A6-but-andhra-pradesh-government-oversteps/

MicroCapital.org story, January 26, 2011: “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Subcommittee Proposes Regulation for Microfinance Institutions (MFI)”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-subcommittee-proposes-regulation-for-microfinance-institutions-mfi/

MicroCapital’s Microfinance Universe profile: Reserve Bank of India (RBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

Browse the MicroCapital Universe and add your entry to the wiki at: https://www.microcapital.org/microfinanceuniverse/

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