Malegam report severely curbs microfinanciers

A slew of interest rate moves and micro-regulation announced on Wednesday could well spell further trouble for microfinance institutions (MFIs).

The Reserve Bank on India (RBI)-appointed panel on microfinance led by Y H Malegam on Wednesday recommended an interest rate cap of 24% for microfinance loans.

It also set an upper limit on individual loans at Rs25,000 to streamline the sector, and said borrowers should not have an annual family income of more than Rs50,000.

The recommendations make compliance impossible for legitimate companies, said Vijay Mahajan, president of the Microfinance Institutions Network, a body of microfinanciers.

“They just can’t comply with them. For instance, there is an income limit set for borrowers. How does an MFI find out the income of every single borrower? There is too much micromanagement in the recommendations. There is also a cap on the quantum of loan and its usage by the borrower. In case the borrower and the MFI agree to adjust the loan amount as per inflation, that would just be impossible,” he said.

The raft of restrictions in the Malegam panel report range from interest rates to margins to everything in the ambit of microlending.

“The report has some good points, sure. The Malegam committee has recognised the role of MFIs in financial inclusion and it has also recommended the creation of a category of non-bank MFIs, implying that it’s fine for NBFCs to be in microfinance,” he said.

The committee capped gross margins at 10% for MFIs having a loan portfolio of Rs100 crore and at 12% for smaller entities.
It also said banks can levy only three extra charges on borrowers — a processing fee, interest and an insurance charge.

To prevent multiple lending and over-borrowing, “ghost borrowers,” and coercive recovery methods, the panel suggested a limit of two microfinance lenders per borrower and the formation of credit bureaus.

To qualify as a NBFC microfinancier, the committee said, an entity should be providing financial services predominantly to low-income borrowers, with loans of small amounts, for short-terms, on an unsecured basis, mainly for income-generating activities.

Their repayment schedules should be more frequent than those normally stipulated by commercial banks, the RBI said on its website.

Such NBFC entities will hold not less than 90% of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets. The report also recommends that not less than 75% of the loans given by an MFI should be for income-generating purposes.

And there is a restriction on the other services to be provided by an MFI, which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed.

Though some of the recommendations are in line with the code of the Microfinance Institutions Network, Mahajan said the body’s way of implementing the code would be different from the RBI’s.

“Once there is a specific number attached to a regulation either in the form of quantum of loan or the income level, it cannot be changed for years. But if the industry body decides on that, it can change it quickly based on the changing dynamics in the market. For instance, the RBI Act still does not match the equity required for setting up a bank as is being sought by the RBI. It is not easy to get the RBI to make amendments to the set of regulations though the market demands such changes,” Mahajan explained.

Kishore Puli, managing director of Trident Microfinance, while preferring to call the report ‘supportive’, points out to the same issues.

“The capping of interest rates at 24% with a margin cap of 10% for players with more than Rs100 crore portfolio is difficult for companies,” he said.

“And the restriction on the number of MFIs lending money to a borrower makes doing business more difficult. The scale of operations will not be available to the companies, forcing costs to go up and even causing losses,” Puli said.