MICROCAPITAL STORY: Reserve Bank of India (RBI) Discussing Regulations Requiring Banks to Devote 10% of Loans to Microfinance

The Reserve Bank of India (RBI), the country’s central bank, is contemplating requiring that financial institutions direct at least ten percent of their total loans to medium small and micro enterprises (MSMEs). These new restrictions would come on top of the current requirements that banks devote at least 40 percent of lending to the priority sector, which includes poor and agricultural areas and industries. These current laws do not require that loans be made to enterprises of a certain size.

According to Dinesh Rai, Secretary to the Ministry of Micro, Small and Medium Enterprises, there are almost 42 million small and medium sized enterprises currently operating in India. She also stated that they account for 40 percent of the total exports and 45 percent of the country’s total manufacturing output. So far, quantitative classifications for ‘small’ and ‘medium’ have been made clear.

It does not appear that there will be any interest rate restrictions on such loans. RBI Deputy Governor K J Udeshi contended that research indicates that small and micro-entrepreneurs are more worried about the availability and timeliness of credit than the cost. She also acknowledged that high costs were the natural result of door-to-door services and small loan amounts. Further details were not available. To learn more about the affect of RBI regulations on microfinance institutions (MFIs), please read this previous MicroCapital story.

By Greg Casey, Research Assistant

Additional Resources:

Economic Times: “RBI plans to increase regulatory means”

Economic Times: “Govt wants 10 pc of banks’ priority sector credit to SMEs”

MicroCapital Story, September 3, 2008: Rising Interest Rates and New Reserve Bank of India Capital Adequacy Requirements Put Pressure on Indian MFIs

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