The Reserve Bank of India has decided to accept the broad framework of the recommendations of the Malegam Committee for the microfinance industry, but it has modified some of the proposals of the committee.

In its policy announcement on May 3, 2011, RBI governor D. Subbarao said that all bank loans to microfinance institutions (MFIs), including non-banking financial companies (NBFCs) working as MFIs would be treated as priority sector lending. However, this will depend on whether the prescribed percentage of total assets of such firms are so-called ‘qualifying assets’ and adhere to ‘pricing of interest’ guidelines.

The central bank said a qualifying asset must fulfill the following criteria::

1. Loan must be to rural household with annual income of not more than INR 60,000 (US$1,350). In case of urban or semi-urban borrower, household income must be INR 120,000 (US$2,700) or less.

2. Loan amount cannot exceed INR 35,000 (US$790) in first cycle and INR 50,000 (US$1,125) in subsequent cycles.

3. A household’s total indebtedness at any given time should not exceed INR 50,000

4. Loan term should not be less than 24 months for amounts more than INR 15,000 (US$340) without prepayment penalty.

5. Loans to be extended without collateral

6. Aggregate amount of loan for income generating purposes must be at least 75% of total advances.

7. Loans must be repayable by weekly, fortnightly or monthly insallments, the choice of which will vest with the borrower.

8. To qualify as priority sector loans, banks must ensure a margin cap of 12% and an interest rate cap of 26%

9. MFI loans can be extended to individuals outside of self-help groups (SHG) or joint liability group (JLG)

10. Bank loans to oher NBFCs will not be treated as priority sector leading effective April 1, 2011.

The central bank will issue detailed guidelines separately.

Additionally, the central bank will also set up a committee to “examine the existing classifications and suggest revised guidelines with regard to priority sector lending classification.”

Photo credit: Flickr user mckaysavage

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7 Comments »

  1. Ravi Said,

    May 4, 2011 @ 4:06 pm

    To run MFI company NBFC is must? what is amount size?

  2. Ravi Said,

    May 4, 2011 @ 4:07 pm

    With out NBFC what is the alternative to run the MFI?

  3. Ravi Said,

    May 4, 2011 @ 4:08 pm

    If any chances Under socities (KSR act1960)to run the MFI?

  4. Ravi Said,

    May 4, 2011 @ 4:11 pm

    Along with another 3 members of my team we registered one micro finance instution under compnies act 1956 but we are not capable mobilise the 200lakh to get NBFC what do? please suggest.

  5. Ravi Said,

    May 4, 2011 @ 4:18 pm

    Our team having Very good knowledge about SHG process and we are grassroot work in women empowerment area

  6. Kurian Katticaren Said,

    June 1, 2011 @ 3:12 pm

    There are several smaller localised community owned/managed cooperatives, producers organisations and theri networks that finance livelihood activities of their members. These have pre-existed MFIs and have drawn livelihood finances from coop banks,NABARD,commercial banks and down lent them to their members.

    However, these “non-commercial”, organisations committed to making timely and adequate credit availabe at less than 21% on declining balances to members – mostly entreprenuers among small scale fishworkers, fish vendors, urban poor women entreperenuers, dalits and tribals in the farm an doff farm sectors – have been submerged under the MFI/NBFC deluge.

    It is important that separtate spaces are assigned for these organisations and that they are not clubbed with MFIs.

    Though all commissions, draft legilations, state ordiances and enactments exclude cooperatives from the purview of MFIs, de facto, no banker makes a real distinction between Coops and MFIs/NBFCs when considering and appraising their financing. The danger then is that several vibrant and competitive localised financial insitututions of excluded communities may perish. That will be a very sad collateral damage.

  7. R Navratan Nahar Said,

    June 12, 2011 @ 6:23 pm

    we are happy to see that RBI Governor granted NBFC Company as a Priority sector.
    But, as on date if we go for any private or national bank they are not funding any Asset Finance NBFC Company(SME) they are funding big NBFC Company only.
    So i request u kindly send details of banks who will fund such companies.
    And we want RBI letter to show the bank.

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