Reserve Bank tightens screw on banks to discipline MFIs….George Mathew
Asks banks to step up microfinance lending; Priority sector tag may go if malpractices continue
Asks banks to step up microfinance lending; Priority sector tag may go if malpractices continue
The Reserve Bank, which is exploring various options to bring in discipline in the microfinance sector, has sent an informal, but tough, message to commercial banks that it will remove lending to microfinance firms from the purview of priority sector lending if MFIs financed by them dont bring down interest rates and stop their coercive practices. It has also started persuading banks to increase their direct exposure to MFIs in a bid to give competition to MFIs and bring sound practices in the sector.
We want banks to finance small borrowers who are currently dependent on MFIs. Banks are taking the easy way out by financing MFIs which in turn lend money to small borrowers in rural areas at higher interest rates. Its easier for banks to recover the money from MFIs. We are asking banks why cant they lend directly to MFIs? said a government source. The RBI has already appointed a committee headed by Y H Malegam to look into the microfinance sector. We will take a view on the regulation only after the committee submits its report.
In other words, the central bank is asking banks when you are in a position to lend directly to small borrowers, why are you routing the money through MFIs which makes the whole process expensive for the borrowers and a money-spinning exercise for MFI promoters? Currently, only MFIs that are registered with the RBI as NBFCs are under the RBIs regulatory purview. Here again, the RBI regulates them only as loan companies. There are societies and trusts acting as MFIs which are not under the RBIs regulation. It is estimated that around 200-300 MFIs are operating in India with a total loan outstanding of Rs 25,000 crore.
Though MFI interest rates are very high at 26-40 per cent, the real problem is something else. The RBI fears that malpractices in lending, multiple lending and coercive practices could create big problems in the sector. We could bring tough regulation in the MFI segment. But it will be counterproductive. Tough regulations mean higher capital, provisioning norms, lending standards, etc. But it will not be possible for MFIs to operate in such tightly regulated environment, a government official said.
As of now, banks are keeping away from direct microfinance lending in view of the costs and logistical issues involved. Besides, banks are hesitant to lend money without any collaterals and they don’t want to add MFI lending to add to their non-performing assets. We can tackle the high interest rates part as the RBI has introduced the Base Rate system in the banking sector. Now the technology has improved. And the RBI has introduced the Business Correspondent model. We expect banks to act on these proposals, the official said.
Meanwhile, anticipating regulatory changes, rating agency Crisil has started conducting a comprehensive assessment of the impact of developments in the microfinance sector on its outstanding ratings on MFIs. It is monitoring the form and extent to which these regulatory developments will be implemented.
URL: http://www.indianexpress.com/news/reserve-bank-tightens-screw-on-banks-to-discipline-mfis/703566/