Malegam Committee Report on Microfinance: What’s On The Platter?

By Ramesh S Arunachalam, Rural Finance Practitioner

microfinance report malegam

Malegam Committee Microfinance Report

The much-awaited Malegam committee report is laudable because it is the 1st committee report of (some) significance to attempt the creation on of a (national) regulatory framework for Microfinance in India. The Malegam committee report must be strongly appreciated because it seeks to legitimize microfinance as an integral part of the Indian financial sector. By recommending creation of a new category – called NBFC MFIs (with associated conditions which are perhaps open for discussion) – the report has clearly positioned and mainstreamed micro-finance within the framework of the larger financial sector in India. This ensures that micro-finance will come under the purview of the RBI and no longer can microfinance be treated as a fringe activity or as an orphaned child in the larger Indian financial sector.

A second aspect that deserves appreciation is the fact that while the report has recommended continuation of priority sector funds for MFIs, it was however made it conditional – especially after recognizing some of the key problems like ghost lending, multiple lending, over lending and attempting to outline some measure to tackle them as well.

A third issue that merits appreciation is the fact that the report has sought to promote greater transparency with regard to interest rates…through various measures.

Fourth, the report has recognized and stressed the importance of off-site and on-site supervision of NBFC MFIs (including systemically important ones) while also alluding to the need for significantly enhancing the supervisory capacity of RBI with regard to micro-finance.

Fifth, the strong emphasis on corporate governance is note worthy and specifically, the committee has suggested that corporate governance rules will have to be specified (encompassing several issues) for NBFC MFIs by the regulator. A very critical aspect indeed…

Sixth, there are several other aspects in the report that require commendation:

  • The intent to ensure that the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFI’s.
  • The strong desire to deal with multiple lending, over lending and ghost lending through several measures including better loan origination procedures, establishment of a credit bureau etc
  • The emphasis on having strong client projection measures in place including various codes for MFI’s
  • The desire to keep NBFC MFIs out of the purview of state level money lending acts

That said, I am therefore a bit perplexed by the strong (initial) criticisms of the Malegam report…While stakeholders appear to have perceived several weaknesses in the report, I try to list some of these below and provide some explanations with regard to these issues, apart from suggesting ways forward. Many of these issues can (easily) be addressed by dialogue and discussion and do not take away the excellent work done by Malegam committee – that is a point that I would like to make clear upfront…

Read on at Microfinance in India Blog

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