The Reserve Bank of India (RBI), India’s central bank, has warned that microfinance institutions (MFIs) will be taken off the priority sector lending list if the industry does not improve its governance standards. Under the current system, banks are required to loan to MFIs and other organizations on the priority sector lending list in order to fulfil part of their “social obligation and regulatory requirement.” Losing priority sector status could mean losing valuable credit lines that MFIs have with banks.

India’s Economic Times (ET) reported that “what’s perhaps worrying the regulator and some of the stakeholders is that MFIs are still being run like small, family-owned firms. Microfinance industry executives told ET on condition of anonymity about dubious practices like board minutes being fudged, senior management trying to enrich themselves, local level staff advancing fresh loans to hide bad debt and staffers running small rackets on the side.”

By: Stefanie Rubin, Research Associate

About the 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, assess the divergence non-performing assets and supervise the rating model for banking sector. RBI operates twenty-two regional offices.

Additional Resources:

Source Article: Economic Times: “RBI to MFIs: Shape up or Face Music,” http://economictimes.indiatimes.com/News/Economy/Finance/RBI-to-MFIs-Shape-up-or-face-music/articleshow/5578151.cms?curpg=1

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