Sub-Committee of the Central Board of Directors. The RBI panel chaired by Mr. Yedzi H. Malegam was established in response to the Andhra Pradesh rules, which severely curtailed microfinance activities in the state, curbed collections and hurt new businesses.
The stock of SKS Microfinance, the main microfinance institution in India, which is based in Hyderabad, the capital of Andhra Pradesh, has fallen about 30 percent since October when the state's new microfinance rules came into effect.
The Panel has made a number of recommendations to mitigate the problems of multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. It seems financial authorities in India are in line with Yunus's article on the future development of the sector. Some of the main recommendations are listed hereafter:
- 1. Creation of a separete category of microfinance institutiones classified as Non-Banking Financial Company (NBFC-MFI). These institutes will hold not less than 90% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets.
- 2. There are limits of an annual family income of Rs.50,000 and an individual ceiling on loans to a single borrower of Rs.25,000.
- 3. Not less than 75% of the loans given by the MFI should be for income-generating purposes.
- 4. There is a restriction on the other services to be provided by the MFI which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed.
- 5. With regard to the interest chargeable to the borrower, the Sub-Committee has recommended an average “margin cap” of 10 per cent for MFIs having a loan portfolio of Rs. 100 crore and of 12 per cent for smaller MFIs and a cap of 24% for interest on individual loans. It has also proposed that, in the interest of transparency, an MFI can levy only three charges, namely, (a) processing fee (b) interest and (c) insurance charge.
- 6. A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG).
- 7. Not more than two MFIs can lend to a single borrower.
- 8. There should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery.
- 9.The tenure of the loan must vary with its amount.
- 10. A Credit Information Bureau has to be established.
-11. The primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management.
-12. The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all MFIs.
- 13. There must be grievance redressal procedures and establishment of ombudsmen.
- 14. All MFIs must observe a specified Code of Corporate Governance.
SKS Microfinance Chief Financial Officer S. Dilliraj said "The panel's recommendations "clears the regulatory ambiguity that existed in the microfinance sector since the promulgation of the Andhra Pradesh Microfinance Ordinance". The fast-growing Indian microfinance sector suffered a setback late last year when the state of Andhra Pradesh, which had the largest microfinance market in India, approved legislation to regulate the industry following complaints about high interest rates, aggressive recovery practices and overextended borrowers.
Some links with further information:
- Y. H. Malegam. Limit on annual income can be changed
- Malegam Committee Microfinance Report – Summary of Reactions from MFI Sector
- Malegam Committee Report – Summary of Key Recommendations
- Interview with Y H Malegam on his report on Indian Microfinance Institutions
- Notional loss due to Andhra ordinance: SKS Microfinance
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