Money & Banking

RBI pulls up banks for non-follow-up of client MFIs' operations

G Naga Sridhar Hyderabad | Updated on February 16, 2011 Published on February 16, 2011


The Reserve Bank of India has found fault with public sector banks for not undertaking review of microfinance institutions' (MFIs') operations after sanctioning credit facility.

In a circular sent to public sector banks, the apex bank had also noted that many MFIs supported by banks were “not engaging themselves in capacity building and empowerment of the groups to the desired extent.''

MFIs were disbursing loans to the newly-formed groups within 10-15 days of their formation, in contrast to the practice obtaining in the SHG-bank linkage programme which takes about 6-7 months for group formation or nurturing/ hand-holding.

“As a result, cohesiveness and a sense of purpose were not being built up in the groups formed by these MFIs,” the RBI said.

MFIs, which were financed by banks or acting as their intermediaries/partners, appear to be focusing on relatively better-banked areas, including areas covered by the SHG-bank linkage programme.

Competing MFIs were also trying to reach out to the same set of poor, resulting in multiple lending and overburdening of rural households, it pointed out.

Taking a dig at banks, the central bank said, as principal financiers of MFIs, they “do not appear to be engaging them with regard to their systems, practices and lending policies with a view to ensuring better transparency and adherence to best practices.”


The RBI has made these observations on the basis of report of a joint fact-finding study on microfinance conducted by itself a few major banks.

It had also asked all scheduled commercial banks to take necessary corrective action where required.

The timing of the circular — which was sent a couple of days back to banks — was crucial as the RBI is currently studying recommendations of Malegam panel on MFIs and is expected to announce a policy shortly.

The panel had suggested that creation of one or more ‘Domestic Social Capital Fund' may be examined by the RBI in consultation with the Securities and Exchange Board of India.

At present, over 75 per cent of finance of NBFCs operating in the MFI sector is provided by banks and financial institutions, including SIDBI.

As of March 2010, the total outstanding loans granted to MFIs were at Rs 13,800 crore. In addition, banks were also holding securitised paper issued by NBFCs to the tune of Rs 4,200 crore, according to the Malegam report.

Published on February 16, 2011
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