MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Enacts Most of Microfinance Guidelines Proposed by Malegam Committee

The Reserve Bank of India (RBI), India’s central banking authority, recently announced that it has accepted – with some modifications – the framework of recommendations issued by the Malegam Committee for the country’s microfinance industry. RBI re-affirmed priority sector status for loans to microfinance institutions (MFIs) under the condition that interest rates for end-borrowers are capped at 26 percent and margins for MFIs and non-banking financial companies (NBFCs) are capped at 12 percent. However, priority sector status will only be granted if microfinance loans are limited to rural households with annual incomes that do not exceed INR 60,000 (USD 1,350) and urban or semi-urban households with annual incomes that do not exceed INR 120,000 (USD 2,700). Priority sector status allows banks to count lending to MFIs towards government-mandated quotas intended to foster financial inclusion.

Following the repayment slowdown that began destabilizing the microfinance sector in the Indian state of Andhra Pradesh in late 2010, the Malegam Committee recommended an interest rate cap of 24 percent and a margin cap of 10 percent for MFIs with a loan portfolio of INR 1 billion (USD 22.5 million) or more and a 12-percent margin cap for smaller MFIs. Further details on the guidelines are scheduled to be issued soon.

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] The Wall Street Journal, May 3, 2011, “RBI Approves Microfinance Regulatory Overhaul”, http://online.wsj.com/article/SB10001424052748703922804576300763771166044.html

[2] Business Standard, May 3, 2011, “MFIs cannot charge more than 26% interest: RBI”, http://www.business-standard.com/india/news/mfis-cannot-charge-more-than-26-interest-rbi/133890/on

MicroCapital.org Brief, March 23, 2011, “Bankers Urge Reserve Bank of India’s (RBI’s) Malegam Committee to Maintain Priority Status for Microfinance Sector”, https://www.microcapital.org/microcapital-brief-bankers-urge-reserve-bank-of-india%E2%80%99s-rbi%E2%80%99s-malegam-committee-to-maintain-priority-status-for-microfinance-sector/

MicroCapital.org Brief, March 15, 2011, “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 Brief, January 26, 2011, “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 Brief, November 9, 2010, “Payment Strike Hits India’s Andhra Pradesh State As Local Governments Urge Microfinance Borrowers Not to Repay”, https://www.microcapital.org/microcapital-brief-payment-strike-hits-india%E2%80%99s-andhra-pradesh-state-as-local-governments-urge-microfinance-borrowers-not-to-repay/

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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