The Malegam Committee, set up by Reserve Bank of India (RBI), has suggested an upper limit of 24 per cent interest rates on microfinance loans to individuals.
It also suggested creating a new category of non-banking finance companies for microfinance lending (NBFC-MFI).
The committee has stipulated that only those NBFCs that provide financial services predominantly to low-income borrowers will be classified in the NBFC-MFI category.
To qualify as an NBFC-MFI, a lender must hold no less than 90 per cent of its total assets in the form of qualifying assets. This excludes cash and bank balances and money-market instruments.
The annual income of a family that gets MFI loans should not exceed Rs 50,000 and there should be a ceiling of Rs 25,000 on loans to a single borrower. It has also recommended that not less than 75 per cent of the loans given by an MFI should be for income-generating purposes.
AIMS AT SETTING HOUSE IN ORDER
- The NBFC-MFI will hold not less than 90 per cent of its total assets (other than cash and bank balances and money market instruments) in the form of qualifying assets
- Limits of an annual family income of Rs 50,000 and individual ceiling on loans to a single borrower of Rs 25,000
- Not less than 75 per cent of the loans by an MFI should be for income-generating purposes
- Restriction on the other services to be provided by the MFI, which has to be in accordance with the type of service and the maximum percentage of total income as may be prescribed
- A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability Group (JLG)
- Not more than two MFIs can lend to a single borrower
- There should be a minimum period of moratorium between disbursement of the loan and the commencement of recovery
- The tenure of the loan must vary with its amount
- A Credit Information Bureau has to be established
- Primary responsibility to avoid coercive recovery to lie with the MFI & its management
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The committee has suggested that its recommendations be enforced by April 1.
To mitigate problems like multiple-lending, over borrowing and coercive recovery, the committee has recommended a variation in the tenure of loans and commencement recovery. Besides, not more than two MFIs should lend to a single borrower.
It suggested a minimum moratorium between the disbursement and recovery of a loan. The pattern of repayment can depend on the nature of the loan. The schedule can be weekly, fortnightly or monthly, depending on the borrower.
According to the recommendations, the primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management. The committee has suggested that in case coercive methods are used, the management should be severely penalised.
The committee has also stated that the RBI must prepare a draft Customer Protection Code to be adopted by all MFIs. There must be grievance redressal procedures, establishment of ombudsmen and all MFIs must observe a specified Code of Corporate Governance, the report added.
MFIs will be allowed to levy only three charges: processing fee, interest and insurance charge.
"NBFC-MFIs should be exempted from state Money Lending Acts, and also that if the recommendations of the committee are accepted, the need for the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act will not survive," the report said.
The Andhra Pradesh government had passed legislation to do away with the abusive practices adopted by MFIs operating in the state. For this, it has proposed setting up fast-track courts in every district for MFIrelated issues.
The committee cautioned industry on the need to protect borrowers. It said if the recovery culture is adversely affected and free flow of funds interrupted, the ultimate sufferers would be the borrowers, as the flow of fresh funds to the microfinance sector will inevitably be reduced.
The committee has also recommended that lending to lowincome borrowers should be treated as priority-sector lending in order to promote financial inclusion.
While the committee suggested that the interest rate should be capped at 24 per cent on individual loans, smaller MFIs charge up to 32 per cent.
Courtesy: Mail Today 
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