Money & Banking

‘RBI steps on MFI loans likely to provide liquidity’

PTI New Delhi | Updated on February 23, 2011 Published on February 22, 2011

The government said on Tuesday that the RBI measures to restructure bank loans to MFIs are likely to impart liquidity support to these institutions.

“In January 2011, RBI extended the special regulatory asset classification benefit to restructured micro finance institutions (MFI) accounts, which are standard at the time of restructuring even if they are not fully secured”, Minister of State for Finance, Mr Namo Narain Meena, said.

These measures would also facilitate them in ‘holding on’ operations for some time till measures are taken to bring about long term and structural changes in the financing of MFIs, Mr Meena said in a written reply in the Rajya Sabha.

The relaxation was granted as a temporary measure and would be applicable to Standard MFI accounts restructured by banks up to March 31, 2011, he added.

As bank loans to MFIs are mostly unsecured, the Indian Banks Association (IBA) had requested RBI in December 2010 to relax its restructuring guidelines for the MFI sector.

Earlier, the Malegam panel constituted by the apex bank, said in its report that loans extended by MFIs should be capped at an interest rate of 24 per cent.

The committee, headed by Reserve Bank’s Central Board Director, Mr Y H Malegam, also suggested small loan ceiling to Rs 25,000 and creation of a separate category of non banking financial companies (NBFC—MFI) for the MFI sector.

Meanwhile, sensing foul play in the launch of new products like loan for men and interest free loans by MFIs, the Andhra Pradesh government is planning to issue a notification to bring these products under the purview of the new Microfinance Regulation Act.

Micro finance lenders have been under scrutiny in Andhra Pradesh, their biggest market in India, after reports of suicides by borrowers came to light following their inability to pay back MFI loans taken at exorbitant interest rates.

It was apparently the coercive methods of MFIs that led to the suicide of a large number of victims in various districts of the state.

Bank funding for micro finance sector has dried up to a great extent ever since the Andhra Pradesh government issued an ordinance to curb the high interest rates and coercive recovery practices of MFIs.

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Published on February 22, 2011
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