MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Directs Banks to Exercise Additional Due Diligence When Lending to Microfinance Institutions (MFIs)

The Reserve Bank of India (RBI), India’s central banking authority, has indicated that banks must perform additional due diligence when lending to microfinance institutions (MFIs) following RBI’s enactment of microfinance guidelines that capped interest rates for end-borrowers at 26 percent and interest rate margins for MFIs at 12 percent.

Unnamed bankers were quoted by the livemint website as saying, “MFIs, who extend micro-loans to the poor, are likely to find borrowing tougher. Banks will now have to make compliance certificates mandatory, track MFIs’ business performance and may even demand higher collateral by way of personal guarantees” [1]. According Vibhav Agarwal, vice-president, research at Angel Broking Limited, a brokerage firm, the additional due diligence likely to discourage banks from lending to MFIs.

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 (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] livemint.com, May 3, 2011, “RBI tells banks to tighten norms”, http://www.livemint.com/2011/05/04224648/RBI-tells-banks-to-tighten-nor.html?atype=tp

MicroCapital.org story, May 5, 2011, “MICROCAPITAL BRIEF: 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 story, March 15, 2011, “MICROCAPITAL BRIEF: Federal Microfinance Bill May Replace Existing State Microfinance Legislation in India”, https://www.microcapital.org/microcapital-brief-federal-microfinance-bill-may-replace-existing-state-microfinance-legislation-in-india/

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

MicroCapital.org story, April 19, 2011, “MICROCAPITAL BRIEF: Indian Banks Seek Personal Guarantees from Microfinance Institution (MFI) Executives As Condition of Debt Restructuring”, https://www.microcapital.org/microcapital-brief-indian-banks-seek-personal-guarantees-from-microfinance-institution-mfi-executives-as-condition-of-debt-restructuring/

MicroCapital Universe Profile: Reserve Bank of India, 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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