RBI forms a panel to examine functioning of micro finance institutions

RBI today announced constitution of a sub-committee to look into the functioning of micro finance institutions (MFIs), as they have drawn flak for using strong arm tactics to recover loans.

MFI tactics have even prompted Andhra Pradesh cabinet to approve an ordinance to rein them in.

"We have constituted a sub-committee to look into the functioning of MFIs sector and what bearing they have on RBI policy to take further action," RBI governor D Subbarao told reporters in Chandigarh after the meeting of the central bank board.

"We have discussed the evolving situation of MFIs sector and as part of our responsibility we are also looking at what is happening in the financial sector", he said.

However, he did not commit to come out with any regulations to deal with MFIs. "Regulations (for MFI).. I cannot really speculate on that."

RBI's move has come a day after the Andhra Pradesh cabinet approved an ordinance yesterday, providing for three year sentence and Rs1 lakh penalty for MFIs harassing borrowers for recovery of loans.

The ordinance is aimed at regulating the functioning of MFIs as well as at checking their strong arm tactics to force borrowers to repay the loan.

Under it, the MFIs are required to register themselves, and the renewal would depend on their track record.

"We discussed the Andhra Pradesh Government ordinance approved by the Cabinet yesterday in board and what really falls in RBI (purview)," Subbarao said.

Stating that RBI regulates Non-Banking Finance Company, he however said that there are a vast number of companies under MFI sector falling out of the purview of the apex bank.

"We discussed implications of development happening in MFI sector", the governor said, adding that RBI does not regulate the interest rate of a large number of MFIs.

The RBI move also follows the sacking of SKS Microfinance CEO Suresh Gurumani by the board, raising corporate governance issues in the MFI sector.

A bill to regulate MFIs is being prepared to be tabled in Parliament.

Yesterday, financial services secretary R Gopalan had said, "There is a regulation for financial institutions in the offing. We are consulting with the stake holders... it has to be taken forward which means we have to take it to cabinet... then it has to be taken to Parliament and there are timelines for all this..." he said.

Finance minister Pranab Mukherjee had also said yesterday that the Centre is closely monitoring MFIs.

MFIs provide loans to the poor segment of the society who generally do not get loans from other institutional framework.