Cap interest rate on MFI loans at 24 per cent: Malegam panel

Mumbai, Jan 19 (PTI) Aimed at reviving the crisis-ridden micro finance sector, a RBI committee today suggestedthat MFIs be allowed to charge a maximum interest of 24 percent on small loans which cannot exceed Rs 25,000.

The committee, headed by Reserve Bank''s central boarddirector Y H Malegam, also pitched for creation of a separatecategory of non-banking financial companies (NBFC-MFI) for themicro finance sector.

The panel also said small loans of up to Rs 25,000could be given to families having an income up to Rs 50,000per annum. On repayment, it said, the borrowers be given theoption of weekly or fortnightly or monthly return of the loan.

It further said at least 75 per cent of loans extendedby micro finance institutions (MFIs) should be for incomegeneration purposes. It further recommended that a borrowercannot take loans from more than two MFIs.

These recommendations, the committee said, should beimplemented from April 1, 2011.

Industry body Microfinance Institution Network (MFIN)termed the recommendations as balanced. MFIN CEO Alok Prasadsaid, "It gives clarity to the industry requirements. Therecommendations have been long demand of the industry."

On interest rate ceiling, he said, the micro financeindustry is already moving in that direction, so it is nothingnew.

RBI constituted the committee in October last year inthe wake of allegations of overcharging and use coerciverecovery practices by MFIs that led to a spate of suicides inAndhra Pradesh.

The decisions taken by the state government toregulate MFIs slowed down loan recovery process hitting thefinancial health of the sector. It was further aggravated bythe reluctance of banks to support MFIs.

To deal with the problem, RBI earlier in the dayrelaxed provisioning norms to enable banks to continuelending to the cash-strapped MFIs.

About the regulations of MFIs, the Malegam Committee,suggested that it should be done by the National Bank forAgriculture and Rural Development (NABARD) in closecoordination with the Reserve Bank of India (RBI).

If the recommendations are accepted, the committeesaid, a separate law enacted by Andhra Pradesh governmentwould not be needed.

With regard to NBFC-MFIs, the committee suggested thatthey should have a minimum networth of Rs 15 crore.

The other members of the panel include industrialistKumar Mangalam Birla, RBI central board member U R Rao and RBIdeputy governor K C Chakrabarty.