MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Asks Banks For Plans on Financial Inclusion and Criticizes Microfinance Institution Interest Rates

Governor D. Subbarao of the Reserve Bank of India (RBI), which is India’s central bank, stated that all banks will be required to formulate and get RBI approval for “financial inclusion plans” by March 2010.  The effort is a part of a wider discussion on whether “financial inclusion” is actually working to integrate poor people into India’s formal financial sector.  Governor Subbarao stated that while RBI is “committed” to allowing banks to lead the effort by creating appropriate “financial inclusion plans,” this commitment “is not irrevocable.” At this point, RBI’s participation is limited to approving bank drafted plans and providing support for sharing information, such as best practices and regulatory incentives.  Governor Subbarao also acknowledged the role of microfinance institutions (MFIs) in serving India’s unbanked population, however, he criticized the practice of lending at rates of twenty-four percent to thirty percent.  Governor Subbarao stated, “Compared to the informal sector, perhaps the rates are lower, but there are questions about whether these rates are affordable. The rate of interest charged should not be out of alignment with the cost of funds, transaction costs, risk costs and a certain margin. In any case, there is a need for transparency….”

About Reserve Bank of India (RBI):

Established in 1935, Reserve Bank of India (RBI) is the nation’s central bank and 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, assess non-performing assets and supervise the rating model for banking sector. RBI consists of twenty-two regional offices. RBI website: http://www.rbi.org.in/scripts/AboutusDisplay.aspx#MF
 

Bibliography:

RBI: http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

Additional Resources:

[1] Original article: http://www.livemint.com/2009/12/09225222/RBI-to-ask-banks-for-plans-on.html

  

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