Malegam panel wants 24% cap on microfinance loans

The Malegam Committee has recommended the capping of the interest rates microfinance institutions charge at 24 per cent.

Besides this, the Reserve Bank of India sub-committee examining ways to revive the fortunes of the beleaguered microfinance institutions sector has suggested creating a separate category of non-banking finance companies to provide financial services to low-income borrowers, and exempting them from the provisions of the Money-Lending Acts.

The new category of NBFC-MFI should be “a company that provides financial services pre-dominantly (90 per cent) to low-income borrowers, with loans of small amounts, for short terms, on unsecured basis, mainly for income-generating activities, with repayment schedules that are more frequent than those normally stipulated by commercial banks” and that satisfy the specified regulations.

The RBI had set up the sub-committee, headed by the Reserve Bank's central board director, Mr Y.H. Malegam, in October 2010, following concerns about high interest rates, coercive recovery processes and multiple lending practised by some microfinance institutions, mainly in Andhra Pradesh.

The committee said that April 1 could be considered as a cut-off date for implementing its recommendations.

Other suggestions include an NBFC will be classified as an NBFC-MFI, provided its exposure is to borrowers with an annual family income of not more than Rs 50,000 and the individual ceiling on loans to a single borrower is Rs 25,000.

Those that do not qualify as an NBFC-MFI would not be permitted to give loans to the microfinance sector that, in the aggregate, exceed 10 per cent of its total assets.

The committee has suggested a cap of 24 per cent on individual loans.

This recommendation has to be made effective to all loans given by MFIs after March 31, 2011.

An average margin cap (the difference between MFIs' borrowing cost and lending cost) of 10 per cent has been recommended for MFIs with a loan portfolio of Rs 100 crore and 12 per cent for smaller MFIs.

On transparency in interest charges, the sub-committee has suggested that there should only be three components — a processing fee, not exceeding 1 per cent of the gross loan amount, the interest charge and the insurance premium — in the pricing of loans.

MFIs should ensure that a borrower is not a member of more than one self-help group/joint liability group and not more than two MFIs should lend to the same borrower.

Under the proposed Micro Finance (development and Regulation) Bill 2010, the sub-committee has recommended that all entities covered by the Act should be registered with the regulator (be it the RBI or Nabard).