The Reserve Bank of India is comfortable with the idea of bringing in a legislation and a new regulator for the microfinance companies as long as theres convergence in the regulation.
“There’s no problem as long as the principles and canons of regulation converge. Just as today the National Housing Bank regulates housing finance companies and the RBI regulates non-banking finance companies,but there is convergence in regulation,” said an RBI official. While NBFCs in the microfinance institutions (MFIs) are reporting to the RBI,trusts and societies acting as MFIs have a different regulation.
As per current regulations,banks lending to MFIs is classified under priority sector loans. “This is so,given the small amounts of loans typically given by MFIs and their reach to the last mile. The issue of whether or not they should continue to be treated as priority sector loans is currently being examined by the V K Sharma Committee. The Reserve Bank does regulate those MFIs which are registered with it as NBFCs. Through this,the RBI regulations cover 70-80 per cent of MFI business,” the RBI official said.
“The proposed Microfinance Bill covers entities,such as,trusts societies,that is,other than NBFCs which are regulated by RBI,” he said. The Bill is now stuck in the Parliament.
On the Sharma panel report,he said,”the report is submitted and will be taken into account by the Malegam committee while making its recommendations.” Lending practices of microfinance companies are a big worry for the Reserve Bank of India.
Some of the microfinance institutions (MFIs) financed by banks or acting as their intermediaries/partners appear to be focussing on relatively better banked areas,including areas covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same area,and trying to reach out to the same set of poor,resulting in multiple lending and overburdening of rural households.
It is learnt that the RBI has been writing to the commercial banks since 2006 about the malpractices in the MFI segment. Many MFIs supported by banks were not engaging themselves in capacity building and empowerment of the groups to the desired extent. MFIs were disbursing loans to the newly formed groups within 10-15 days of their formation,in contrast to the practice obtaining in the SHG – Bank linkage programme which takes about 6-7 months for group formation / nurturing / handholding. As a result,cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs.
Banks,as principal financiers of MFIs,do not appear to be engaging them with regard to their systems,practices and lending policies with a view to ensuring better transparency and adherence to best practices. In many cases,no review of MFI operations was undertaken after sanctioning the credit facility, the RBI had said in a circular to banks earlier.