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LATEST NEWS UPDATES | Banks want RBI to watch MFIs

Banks want RBI to watch MFIs

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published Published on Dec 22, 2010   modified Modified on Dec 22, 2010

Fearing a default from Andhra Pradesh-based microfinance institutions (MFIs), whose cash flows have been disrupted by new laws, lenders have asked RBI to ensure stability by bringing the sector under its purview.

In a meeting called by the Reserve Bank to discuss funding of MFIs, it asked banks whether the institutions were repaying loans on time and if the end-borrower was suffering because of the credit crunch faced by them. RBI had recently collected data from banks on their exposure to the MFI industry.

Bankers told RBI that although there has not been any major default, lenders are worried about the impact of the new law introduced by Andhra Pradesh that bars them from weekly debt recovery. The state has introduced its own laws even as the central government dithers over a new legislation.

The finance ministry has now said it will introduce the bill after taking into account recommendations of an RBI committee headed by YH Malegam, a director on the its board. Bankers fear that in the absence of any regulation, each state government may decide to take matters in its own hands through legislation.

“Such a law will kill the entire microfinance initiative. Before other state governments also come out with such restrictive legislation, RBI should either take the initiative to identify a regulator for MFIs or take up the responsibility,” said a banker present at the meeting.

CEOs of leading private and PSU banks, including ICICI CEO Chanda Kocchar, HDFC Bank CEO Aditya Puri , Axis Bank CEO Shikha Sharma, and Bank of Baroda Executive Director RK Bakshi, spelt this out at a meeting with senior RBI officials on Wednesday. The meeting was attended by two RBI deputy governors, Shyamala Gopinath and KC Chakrabarty, along with executive director Anand Sinha and other officials. But the officials did not commit whether the central bank would regulate MFIs.

Banks have said they are willing to lend to MFIs provided these entities are regulated by a central body like RBI. Banks feel that the central bank is best placed to regulate these institutions since it has the clout as well as understanding of the problems facing the industry.

Although RBI has not barred banks from lending to MFIs, it has expressed concerns with the high rates of interest charged by MFIs to end-borrowers. The apex bank has placed on banks the onus of ensuring MFIs don’t charge more than 24% for their loans.

While lenders are willing to continue funding cash-strapped MFIs, it will not be without conditions. “They should chip in equity, accept a lower rate of growth, and spell out the sources of balance funding. MFIs as a concept has caught on in several markets where these institutions make decent profit. In India, it has been abused by some people,” said the banker. What lenders are objecting to are the super-normal profits earned by MFIs and some of the coercive lending practices.

“Let the government, banks, MFIs and RBI sit together to decide the course. The Andhra ordinance is no solution. Even the state government does not have administrative machinery to follow the recovery processes laid down by the new law,” said another banker. The banks told RBI that they are not averse to lending to MFIs, which have benefited 20 million poor women.


The Economic Times, 23 December, 2010, http://economictimes.indiatimes.com/news/economy/finance/banks-want-rbi-to-watch-mfis/articleshow/7148062.cms


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