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Banks have not resumed lending to microfinance institutions and are currently in the ‘holding operation' mode with regard to their exposure to these institutions, according to Dr K. C. Chakrabarty, Deputy Governor, Reserve Bank of India.
The lenders have taken this position as they want to be assured that MFIs are adhering to the latest guidelines issued by the central bank, he said. They also want the air cleared on the restructuring of the accounts of large MFIs from Andhra Pradesh.
MFIs from the southern State are facing a tough time as the Government has passed a stringent legislation which has crimped their functioning.
Following the passing of the Andhra Pradesh Microfinance Institutions (Regulation of Moneylending) Act, 2010, collections in AP have slowed considerably as repayment of loans can happen only at panchayat offices and interest rates charged on loans capped. Further, multiple lending to the same borrower has been reined-in.
Prior to October 2010, MFI agents could visit the borrowers at their homes to make recoveries. The Act was passed by the State Assembly last December to rein-in the coercive recovery methods employed by some MFIs and also to cap interest rates.
Latest guidelines
As per the latest RBI guidelines on the functioning of MFIs, these institutions can extend collateral-free loans only to a borrower whose household annual income in rural areas does not exceed Rs 60,000 while for non-rural areas it should not exceed Rs 1,20,000. Total indebtedness of the borrower cannot exceed Rs 50,000.
Loans are repayable in weekly, fortnightly or monthly instalments at the choice of the borrower. Further, the banks have to ensure that MFIs comply with the following caps on margin and interest rate (calculated on a reducing balance basis) as also other ‘pricing guidelines'.
Financial Inclusion
At a summit on inclusive growth, Dr Chakrabarty said that around 3,50,000 villages could potentially be provided financial services by March 2013 under the financial inclusion plans (FIPs) of banks submitted to the RBI.
Emphasising that un-banked villages and the poor provide business opportunity for banks and other financial intermediaries, he said that under FIP, banks can make money only by offering credit facilities and not via remittances and selling third-party products.
Front-end devices employed by banks to reach financial services to villages must be capable of transacting a minimum of four products — a savings-cum-overdraft account; a remittance product for Electronic Benefit Transfer and other remittances; a pure savings product, ideally a recurring or variable recurring deposit; and entrepreneurial credit.
Going ahead, banks' focus should be on having a combination of ‘brick and mortar' branches and ‘click and mouse' business correspondent (BC) outlets for providing banking services at all villages.
As per RBI statistics, villages with above 2,000 population covered by banking services increased from 27,743 at end-March 2010 to 53,397 at end-March 2011. And villages with below 2,000 population covered by banking services rose from 27,014 to 46,443.
During this period, the number of villages covered through BCs increased from 33,158 to 76,801, and the number of no-frills accounts from 49.55 million to 74.39 million.
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