The Reserve Bank of India on Friday 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.

The MFI tactics have even prompted the Andhra Pradesh Cabinet to approve an ordinance to rein them in.

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

We have discussed the evolving situation of the 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 the MFIs. Regulations (for MFI).. I cannot really speculate on that. The RBI's move has come a day after the Andhra Pradesh Cabinet approved an ordinance on Thursday, providing for three-year sentence and Rs.1 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 on Thursday in board and what really falls in RBI (purview), Dr. Subbarao said.

Stating that the RBI regulates non-banking finance company, he, however, said there were a vast number of companies under the MFI sector falling out of the purview of the apex bank.

We discussed implications of development happening in the MFI sector,'' the governor said, adding that the RBI did 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. Commenting on the performance of banks' penetration in hinterlands, Dr. Subbarao said, There is a view that MFIs charge high rate of interest...but if the banks cover the last mile, many of the MFIs can get institutional credit at cheaper rate. He added, We are marshalling all the arguments and I am not suggesting we will initiate legal actions but we will consult with the government.

Capping of interest rates by MFIs has evoked a sharp division among stakeholders. A Bill on MFIs, however, is not likely to cap interest rates.

Asked about further monetary steps that the RBI would take to tame inflation, he said, we will study the desegregate (inflation) data in the money policy review next month.''