Reserve Bank of India Issues New Microfinance Regulations

With the country's political climate growing increasingly hostile toward microfinance institutions (MFI), the Reserve Bank of India has accepted, with some modifications, the broad regulatory framework proposed by a committee tasked with reviewing the country's microcredit system, the Wall Street Journal reports.

Critics of the microfinance industry in India allege that some MFIs are profiteering at the expense of vulnerable borrowers by charging interest rates as high as 40 percent and using coercive methods to recover loaned funds. Under the new framework, which was created by a panel headed by Y.H. Malegam, former chair of the country's National Advisory Committee on Accounting Standards, MFIs would only be eligible for priority sector loans if they capped interest rates at 26 percent and margins at 12 percent. The central bank also will limit the size of loans, put a ceiling on the total amount of debt that individual households can take on, impose a minimum loan term, and implement other measures to protect borrowers.

In addition, the new regulations will apply to non-banking financial companies — institutions that provide banking services without meeting legal requirements that qualify them as a bank — functioning as MFIs.

SKS Microfinance, the country's largest microlender, responded to the new regulations in a statement: "We are particularly pleased to see that the RBI has reaffirmed priority sector status for microfinance and broadened some of the parameters, such as increasing the annual income limits for eligible households to 60,000 rupees [US $1,350] for rural and 120,000 rupees [US $2,700] for urban and semi-urban, increasing the interest cap and margin cap."

Anant Vijay Kala. "RBI Approves Microfinance Regulatory Overhaul." Wall Street Journal 05/03/2011. Tanmaya Nanda. "RBI Issues Guidelines for Microfinance Industry." Beyond Profit 05/03/2011.