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RBI look for details of bank exposure to MFIs
November, 24th 2010

As the functioning of non-banking finance company-microfinance institutions are causing concern, the Reserve Bank of India has called for data from all banks on their exposure to these institutions.

Given that MFIs' operations have been impacted due to the Ordinance passed by the Andhra Pradesh Government last month, bankers fear that their loans to these institutions could turn bad.

Almost a third of MFIs' outstanding loans are in Andhra Pradesh. Banks have a collective exposure of about Rs 11,000 crore to MFIs.

The RBI, say bankers, may be trying to assess the quantum of loans that could turn bad and whether banks could go in for debt restructuring.

A series of reports about borrowers in rural Andhra Pradesh ending their lives due to strong arm recovery practices adopted by recovery agents led the AP Government to pass the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance, 2010, in October.

MFIs in the State are finding the going tough after the Ordinance was passed. Recoveries have come to a standstill as MFIs cannot deploy agents for recovery. On the interest rate front, the Ordinance has prescribed that no MFI can recover from the borrower an amount in excess of the principal amount.

Fearing bad loans, banks have become wary of taking further exposure to the MFI sector.

Industry-watchers say dual regulation by the RBI and the Andhra Pradesh Government of MFIs is bad for the sector. They pointed out that dual regulation has proved to be the bane of co-operative banks.

Mr Alok Prasad, CEO, Microfinance Institutions Network (MFIN), the umbrella body of all MFIs registered as NBFCs, said the MFI sector would be better off if it was regulated by the RBI and a Central Legislation.

With the MFIs' lending and recovery practices not going down well with the stakeholders rural borrowers, banks, RBI and the Government the RBI has set up a sub-committee to study issues and concerns in the microfinance sector.

The sub-committee, headed by Mr Y.H. Malegam, a senior member of the Reserve Bank's Central Board of Directors, will review the definition of microfinance' and microfinance institutions' for the purpose of regulation of NBFCs undertaking microfinance and examine the prevalent practices of MFIs in regard to interest rates, lending, and recovery practices.

It will also examine and make appropriate recommendations in regard to applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs.

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