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.”
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