RBI panel proposes guidelines for microlenders

The Reserve Bank of India (RBI) temporarily relaxed rules for bank loans to the microfinance sector, and set out proposed guidelines for lenders to the poor.

The fast-growing sector suffered a setback late last year when Andhra Pradesh, which had the largest microfinance market in India, approved legislation to regulate the industry following complaints over high interest rates, aggressive recovery practices and overextended borrowers.

Microlenders in India typically make loans of about $140, mostly to women.

A RBI panel recommended a margin cap of 10% on the cost of funds for larger microfinance lenders, and 12% for smaller lenders, in a sector where interest rates can top 30%.

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 the sector, which has grown quickly, and which 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 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% 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," said Anurag Agarwal, senior vice president at Intellecap, a Hyderabad-based microfinance consultancy.

Some have argued that microfinance companies should not be profit-driven, while others say profits allow lenders to lend to more poor borrowers.

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.