The rural ministry has suggested conversion of micro finance institutions (MFIs) into local area banks. It proposes to create a separate category below local area banks for MFIs. Accordingly, the ministry has sought amendment in the banking regulation act. Local area banks cater to credit needs of rural people with a suite of products. If the proposal is passed, MFIs can provide variety of products. “This will probably enable MFIs to do the business of deposit taking along with lending. Once they are converted into rural area bank, their credit limit may also be enhanced. Currently, they are not allowed to lend more than Rs 50,000 to a single borrower. The government probably wants MFIs to pursue a bank’s business model and to own more responsibility of what they do,” an analyst from a rating agency told Moneycontrol.com on condition of anonymity. As per the Reserve Bank of India’s (RBI) stipulation, the minimum paid up capital to set up such a bank should be Rs 5 crore, with at least Rs 2 crore being contributed by the promoters. The area of operation shall be a maximum of three districts. MFI industry in India has been facing a tough time since October, 2010 when the state government of Andhra Pradesh passed a legislation effectively shutting down private sector institutions in the wake of rising number of suicide cases. Andhra is the so-called epicenter of MFI activities in India. Later, a sub-committee of the central board of directors of RBI under the chairmanship of Y H Malegam was formed to study issues and concerns in the MFI sector in January, 2011. Based on the committee’s recommendations, the RBI earlier this month, came out with a set of new norms for MFIs.
Some key norms include:
• Capping of net interest margin of individual MFIs to 12% (NIM is the difference between interest earned and expended.)
• Interest on individual loans will not exceed 26% per year (earlier it was in the range of 35-40%)
• Interest on individual loans will not exceed 26% per year (earlier it was in the range of 35-40%)
• Not more than two NBFC-MFIs should lend to the same borrower.
• Total indebtedness should cross Rs 50,000 a borrower
• Total indebtedness should cross Rs 50,000 a borrower
Recently, RBI Deputy Governor, H. R. Khan was also quoted saying that MFIs would be allowed to draw external commercial borrowings of up to $10 million. However, they need to have proper hedging strategy.
Moneycontrol
