CARE Ratings views on Microfinance Policy of RBI

RBI, in its monetary policy statement for 2011-12, has accepted the broad framework of regulations for the microfinance sector
recommended by the Malegam Committee with some specific changes incorporated after taking the views of various stakeholders.

The guidelines are expected to reduce the regulatory uncertainty prevailing in the sector to a large extent. While the implementation of these guidelines will put the industry in a transition phase in the short to medium term, the long term impact of the same is expected to be positive by providing a stable regulatory environment under which the sector can operate.

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While the detailed guidelines would be available later, some of the specific points covered by the guidelines include continuance of loans given to all MFIs (including NBFCs) as indirect priority sector lending (with certain qualifications) and allowance of
individual microfinance loans outside the SHG/JLG models. The guidelines also provide for a margin cap of 12 percent and interest rate cap of 26 percent.

Overall the guidelines reflect the fact that the regulators and the government recognize microfinance sector as an important tool for financial inclusion and aim towards creating a regulatory framework for healthy development of the sector while addressing some of the key concerns raised by various stakeholders. They also recognize the heterogeneity of the MFIs operating in various geographical locations with different operating models (SHG/JLG/Individual).

Brief on RBI Guidelines for Microfinance presented in the Monetary Policy

The guidelines specify that bank loans given to all MFIs (including NBFCs) on or after April 1, 2011 will be eligible for priority sector loans under respective category of indirect finance only if the a certain minimum percentage of their total assets are ‘qualifying assets’ and they adhere to ‘pricing of interest’ guidelines to be issued.

The document does not specify what is that minimum percentage of total assets and what are the pricing of interest guidelines, both of which are expected to be available once detailed guidelines are issued. The criteria for ‘qualifying assets’ is broadly provided and MFIs need to adhere to these criteria while giving microfinance loans if they want to remain qualified for indirect priority sector lending. The same is summarized in the table below:

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