RBI panel proposes guidelines for microlenders

The Reserve Bank of India (RBI) temporarily relaxed rules for bank loans to the microfinance sector, which will allow banks to continue lending to the embattled industry, and unveiled proposed guidelines for the lenders to the poor. The RBI panel's recommendations include margin caps and other measures for a sector that has been hit hard since a key state imposed strict regulations in response to complaints over high interest rates, aggressive recovery practices and overextended borrowers. Microlenders in India typically make loans of about $140, mostly to women. The panel recommended a margin cap of 10 percent over the cost of funds for larger microfinance lenders and 12 percent for smaller lenders in a sector where interest rates can top 30 percent. The report also recommended limiting to two the number of microfinance firms that can lend to the same borrower, and called for a customer protection code for microfinance companies. Other recommendations include creating a separate category of non-banking financial companies (NBFCs) in the sector, which will be designated as NBFC-MFIs. The panel was appointed in October to look into problems confronting the sector, which had been growing quickly and has outstanding loans of more than $6 billion. The recommendations, which were generally in line with industry expectations, are not binding but are expected to act as guidelines for the loosely regulated sector. Shares of India's largest microfinance company SKS Microfinance, which have fallen by more than half since the company went public last August, ended nearly 3 percent higher after the RBI's move to temporarily ease lending rules. EASING CREDIT The RBI will temporarily allow banks to classify as standard loans to microfinance firms that are potentially delinquent, which is expected to ease the flow of credit to the industry. "The fact that the RBI is making an exception on behalf of MFIs (microfinance institutions) and taking special steps to support the industry is a good sign from a direction point of view," said Anurag Agarwal, senior vice president at Intellecap, a Hyderabad-based consulting firm in the microfinance segment. Some critics have argued that microfinance companies should not be profit-driven, while supporters say profits allow lenders to lend to more poor borrowers. The southern state of Andhra Pradesh, which was the largest microfinance market in India, imposed a series of regulations on the sector in October that has severely curtailed operations in the state. India's central bank and finance ministry have both spoken up in support of the sector. "The Sub-Committee has cautioned that while recognising the need to protect borrowers it is also necessary to recognise that if the recovery culture is adversely affected and the free flow of funds in the system interrupted, the ultimate sufferers will be the borrowers themselves," an RBI statement said.