Malegam Committee Report – Summary of Key Recommendations

By Ramesh S Arunachalam, Rural Finance Practitioner

We have all being waiting for this report[i] and here is the summary of recommendations…taken from the report…I will start providing an analysis of the same, bit by bit, hereafter…

“The Board of Directors of the Reserve Bank of India, at its meeting held on October 15, 2010 formed a Sub-Committee of the Board to study issues and concerns in the microfinance sector in so far as they related to the entities regulated by the Bank.

The composition of the Sub-Committee was as under:-

1. Shri Y.H. Malegam – Chairman
2. Shri Kumar Mangalam Birla
3. Dr. K. C. Chakrabarty
4. Smt. Shashi Rajagopalan
5. Prof. U.R. Rao
6. Shri V. K. Sharma (Executive Director) – Member Secretary

1.3 The terms of reference of the Sub-Committee were as under:-
1. To review the definition of ‘microfinance’ and ‘Micro Finance Institutions (MFIs)’ for the purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and make appropriate recommendations.

2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers’ interests.

3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the Reserve Bank and the regulatory framework needed to achieve those objectives.

4. To examine and make appropriate recommendations in regard to applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs.

5. To examine the role that associations and bodies of MFIs could play in enhancing transparency disclosure and best practices

6. To recommend a grievance redressal machinery that could be put in place for ensuring adherence to the regulations recommended at 3 above.

7. To examine the conditions under which loans to MFIs can be classified as priority sector lending and make appropriate recommendations.

8. To consider any other item that is relevant to the terms of reference.


Recommendation # 1: New Category of NBFCs Called NBFC MFIs…

We would therefore recommend that a separate category be created for NBFCs
operating in the Microfinance sector, such NBFCs being designated as NBFC-MFI.

The Sub-Committee recommends that a NBFC-MFI may be defined as

“A company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf”.

Recommendation # 2: NBFC To Satisfy Certain Conditions (Non-Negotiables) To Be Classified as NBFC MFI…

We would, therefore, recommend that a NBFC classified as a NBFC-MFI should satisfy the following conditions:

a) Not less than 90% of its total assets (other than cash and bank balances and money market instruments) are in the nature of “qualifying assets.”
b) For the purpose of (a) above, a “qualifying asset” shall mean a loan which satisfies the following criteria:-
i. the loan is given to a borrower who is a member of a household whose annual income does not exceed Rs. 50,000;
ii. the amount of the loan does not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000;
iii. the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000 and 24 months in other cases with a right to the borrower of prepayment without penalty in all cases;
iv. the loan is without collateral;
v. the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs;
vi. the loan is repayable by weekly, fortnightly or monthly
installments at the choice of the borrower.

c) The income it derives from other services is in accordance with the
regulation specified in that behalf.

We would also recommend that a NBFC which does not qualify as a NBFC-
MFI should not be permitted to give loans to the microfinance sector, which in
the aggregate exceed 10% of its total assets.

Areas of Concern

In particular, in the Indian context, specific areas of concern have been identified: These are:
a) unjustified high rates of interest
b) lack of transparency in interest rates and other charges.
c) multiple lending
d) upfront collection of security deposits
e) over-borrowing
f) ghost borrowers
g) coercive methods of recovery

The following recommendations are made with regard to these areas of concern…

Read the rest on the Microfinance in India Blog

malegam report rbi microfinance

Abhay N

Author : 

Abhay is the founder and managing editor of India Microfinance. He is passionate about microfinance, financial inclusion and social entrepreneurship in India.

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1 Comment

1 Comment

  1. Chetna Sinha

    October 25, 2011 at 2:50 pm


    Mann Deshi mahila cooperative bank is glad that RBI has invited recommendations on malegam committee.

    I am very much thankful that RBI (UBD) has given exemption to SHG group lending from unsecured loan. I am also appreciating that business correspondence model has been introduce to co-operative Bank. Mann Deshi, which received its operating license in 1997 and is operating in rural and remote location in Maharashtra, has generated its resources with share capital and mobilized deposits with a lot of hard work and dedication. Mann Deshi is first bank to provide small loans to farming house hold and bring them under of SHG and JLG lending. Mann Deshi has designed the innovative product according to the cash flow of client. Mann Deshi gives umbrella to street vendors, food grain container to farmers.

    After fifteen years of experience providing banking and financial services to this marginalized population, I would like to make some recommendations on Report of the Sub- Committee of the Central Board of Directors of RBI, to Study Issues and Concerns in the MFI sector.

    1. Exemption of JLG Group lending from unsecured loan category:
    SHG Group lending has been exempted from unsecured category of loan. Mann Deshi welcomes this decision. JLG Group lending is still considered under unsecured category. Mann Deshi strongly request to exempt JLG group lending from category of unsecured loan. Though Mann Deshi suggests it can be treated as unsecured if these loans go under NPA. But if loans are regular then “they should not be treated as unsecured loan.”

    2. Branch Licensing:
    RBI has issued new policy of branch licensing for co-operative banks. Under new policy branch licensing is linked with assessed net worth (ANW) of each branch. New policy emphasized ANW should calculated at branch level. Previous policy of giving branch license to 10% of existing branch in a year was much better for small banks. Current policy restricts small banks from expansion and puts small banks into viscous circle of scarcity of capital. Share capital cannot increase without expansion. Mann Deshi requests RBI to continue with previous policy of giving branch licenses 10% of existing branch a year. RBI can led down criteria fulfillment of CRAR.

    3. Relaxations in two tier capital:
    I am very much pleased to RBI has allowed cooperative banks to mobilize two tier capitals. Through this policy bank can raise capital (non-insured deposit) which may help banks to increase the capital. This policy with so much of restriction actually is not very helpful. Under this norm RBI has put a condition that while launching up product to generate capital bank has to take permission from RBI. That is acceptable. But the condition of seeking the permission from RBI before giving back a matured deposit to the client is creating hindrance. As who will invest in this product if permission has to be taken at the time of withdrawal? Instead RBI should put the condition define CRAR and if banks maintains the CRAR then RBI should allow bank clients to do withdrawal at the time of maturity without seeking the permission from RBI.

    4. Requirement of Share Capital:
    We have expertise in reaching the unbankable and an innovative monitoring system of field agents and simputers to make lending across remote geographical areas a profitable reality. We therefore request RBI allow us to raise capital from wherever possible and not restrict our geographical area of operation. We are not requesting we be granted additional branch licenses, only that we be allowed to raise share capital and further financial inclusion across the state. We would like to emphasize that cooperative banks should not have a geographical restriction when it comes to raising capital, today only schedule bank can operate all over the state. All the cooperative banks should be allowed whole state under the area of operation where they are registered.

    5. Multiple Borrowing (Recommendation 9.7) :
    A. MFIs should lend to an individual borrower only as a member of a JLG and should have the responsibility of ensuring that the borrower is not a member of another JLG.
    B. A borrower cannot be a member of more then one SHG/JLG.
    C. Not more than two MFIs should lend to the same borrower.
    D. There must be a minimum period of moratorium between the grant of the loan the commencement of the repayment.
    E. Recovery of loan given in violation of the regulations should be deferred till all prior existing loans are fully repaid.

    How do we make sure that multiple borrowing will not happen? I think we should take care that multiple borrowing should not happen, but do not build more rules and laws. Even if there is suggestion of setting up the credit bureau, then the question arises who will pay for the credit bureau? Burden of paying fees should not be led on borrower. Mann deshi has experience in cooperative sector there is practice that borrower has to get the certification from other bank about the status of their loans and all the banks are charging fees to give their certification. In case of nationalized bank there are even charging the borrower’s guarantors. Charges of nationalized banks are highest. Where as many cooperative bank have decided to waive the charge Mann deshi bank do not charge for this certification. Mann Deshi request that even if credit bureau is set up then fees should not be charge on borrowers.

    6. Credit information Bureau (Recommendation 10.4):
    The issue is until the Credit Information Bureau starts functioning what can be done in the prevention of multiple-lending and over borrowing. As per recommendation 10.4 MFIs should have the responsibility to make reasonable enquiries to find out a prospective borrower’s outstanding loans.Given the fact that most loans are given to borrowers in a village and the fact that MFIs have field staff who have sources of information, this should not be too onerous a task. But our issue is “who will pay for that?”

    Suggestions: Borrower should not be charged to obtain this information. I f MFI will have to pay for this services from where MFI will pay finally it will come through the interest MFI earns. This bureau will create the burden and delays on the part of borrower to get the loan.RBI are already issuing customer protection code this matter can be resolve under that.

    7. Support to SHG and JLGs (Recommendation 14.5):
    Under both the SBLP model and the MFI model greater resources are devoted to professional inputs both in the formation of SHGs and JLGs as also in the imparting of skill development and training and generally in handholding after the group is formed. This would be in addition to and complementary to the efforts of the State Governments in this regard. The architecture suggested by the Ministry of Rural Development should also be explored.

    But no clear cut instructions are given by Ministry of Rural Development that “How do we do that”? Unless and until MFIS will not get the directions how can they move forward? It is very difficult to work with the government department because of its bureaucratic procedures.

    8. Corporate Size (Recommendation 15.3):
    As per recommendation 15.3 all NBFC-MFIs should have a minimum Net worth of Rs.15 crores. This is sky-scraping and why for MFI’s. Request you to please reduce this requirement.

    Malegaum committee has also recommended that exploring the possibilities of issuing new licenses for cooperative banks. Mann Deshi welcomes this thought process. There is suggestion regarding setting up the board of Management which will be responsible and answerable to RBI. Mann Deshi welcomes this decision; Mann deshi’s request that there should not be delays in procedures because of beurocracy.

    9. Priority Sector Status (Recommendation 19.5):
    As per recommendation 19.5, “Bank advances to MFIs should continue to enjoy “priority sector lending” status. Glad to hear that this decision has happened.

    MFIs should be encouraged to issue preference capital with a ceiling on the coupon rate and this can be treated as part of Tier II capital subject to capital adequacy norms. Mann Deshi welcomes the decision.

    Other Recommendations:

    A. Banking to migrant population: Mann Deshi started and is operating villages. Majority of the population of village is migrating. Today there is no facility given to this migrant population to do remittances. Even today this population looses their money. There is urgent need to provide remittance facility to migrant population.

    B. Ground-breaking partnerships: Even today NABARD do not work with urban cooperative bank. If NABARD can give loans to primary agriculture societies at very low interest, why not to cooperative banks like Mann Deshi? Mann Deshi does 100% financial inclusions. Unlike other sectors that provide services to rural populations, cooperative banks do not receive financial support or packages from the government.

    We recommend that NABARD should also give debt fund for micro-finance to rural folk. Through Urban cooperative bank which is below 4% rate of interest, SIDBI does provide a debt fund for microfinance. But the cost of debt fund should not be very high; it should be around 3 to 4%. Then only rate of interest in microfinance lending will reduce.

    C. Nationalize Housing Bank (NHB): NHB also does not work with cooperative banks; it only works with NGO’s. The scale of NGO is not going to solve the problem of homeless people in India. NHB should also work with partnership of cooperative bank to provide housing loan to homeless. Even the interest rates of NHB are very high; the rate of interest of NHB needs to be brought down. Housing to poor and marginalized is very significant. There are hous holds in semi urban areas whose monthly income ranges from 15000 to 25000 they are not able to own house as there is no banking product available for them.

    Mann Deshi provides the housing to the low-income group who have never owned household specially women. Today more than 6000 women have been able to acquire the houses/property because of Mann Deshi. Even the interest rates of NHB are very high; this increases the price of loan to end users.

    For mortgages it is a tire some job. Nearly 30 days are wasted by the client in revenue department and get the mortgage done. While lending to primary agriculture society a simple mortgage is allowed where you do not have to go to revenue department, you can get it done through the village Talathi. There is no cost of stamp duty involved in it. Why this simple equitable mortgage process is not considered for the cooperative banks? Even if the stamp duty is reduced if women own property then there will be motivation for the ownership of property to women.

    Thank you very much !

    Sincerely yours,

    Chetna Gala Sinha,
    Founder Chair,
    Manndeshi Mahila Sah. Bank Ltd., Mhaswad,
    Yale University Fellow,
    Ashoka Fellow, India,
    Ph.No.+91 2373 270788, 270141
    Mobile No. + 91 9423033481
    Email id : chetnavsinha@gmail.com
    Visit us at : http://www.manndeshibank.com

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