MICROCAPITAL BRIEF: Microfinance Information Exchange (MIX): Microfinance Institutions Will Face Difficulties Meeting New Reserve Bank of India (RBI) Regulations

Microfinance Information Exchange (MIX), the US-based, nonprofit data provider, foresees a significant impact on microfinance institutions (MFIs) in India as a result of the regulations that were recently issued by the Reserve Bank of India, the country’s central banking authority, in response to the turmoil that has disrupted the microfinance sector since late 2010, particularly in the state of Andhra Pradesh. In a recent publication, MIX investigates two main components of the regulation that microfinance institutions (MFIs) must adhere to in order for their lending to be funded by banks as “priority sector” loans: (1) an interest rate margin cap of 12 percent and (2) an interest rate cap of 26 percent. Priority sector status allows banks to count lending to MFIs towards government-mandated quotas intended to foster financial inclusion.

MIX concludes that when the sector is examined as a whole, MFIs have generally maintained interest rates below the prescribed 26 percent interest rate level, but margins have exceeded the limit mandated by the RBI by between 1 percent and 2 percent.

By Jacqueline Foelster, 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 (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: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, 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 owns a one-percent stake in NABARD as of 2011.

Source and Additional Resources:

[1] Microfinance Information Exchange (MIX), May 2011, “Reviewing the Reserve Bank of India’s Microfinance Framework”, http://www.themix.org/publications/mix-microfinance-world/2011/05/reviewing-reserve-bank-indias-microfinance-framework

MicroCapital.org Brief, May 18, 2011, “Credit Rating and Information Services of India Limited (CRISIL) Predicts Reserve Bank of India Guidelines Will Spur Bank Lending to Microfinance Institutions (MFIs), Trigger Consolidation”, https://www.microcapital.org/microcapital-brief-credit-rating-and-information-services-of-india-limited-crisil-predicts-reserve-bank-of-india-guidelines-will-spur-bank-lending-to-microfinance-institutions-mfis-trigger-conso/

MicroCapital.org Brief, May 16, 2011, “Women’s World Banking (WWB) CEO Mary Ellen Iskenderian Anticipates Risks from “Over-Regulation” of Indian Microfinance Sector”, https://www.microcapital.org/microcapital-brief-women%E2%80%99s-world-banking-wwb-ceo-mary-ellen-iskenderian-anticipates-risks-from-%E2%80%9Cover-regulation%E2%80%9D-of-indian-microfinance-sector/

MicroCapital.org Brief, May 10, 2011, “Reserve Bank of India (RBI) Directs Banks to Exercise Additional Due Diligence When Lending to Microfinance Institutions (MFIs)”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-directs-banks-to-exercise-additional-due-diligence-when-lending-to-microfinance-institutions-mfis/

MicroCapital.org Brief, May 5, 2011, “Reserve Bank of India (RBI) Enacts Most of Microfinance Guidelines Proposed by Malegam Committee”, https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-enacts-most-of-microfinance-guidelines-proposed-by-malegam-committee/

MicroCapital.org Brief, March 14, 2011, “India’s Andhra Pradesh State to Tighten Local Microfinance Institutions (Regulation of Moneylending) Act”, https://www.microcapital.org/microcapital-brief-indias-andhra-pradesh-state-to-tighten-local-microfinance-institutions-regulation-of-moneylending-act/

MicroCapital 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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