RBI to bring out law to govern micro finance institutions

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SME Times News Bureau | 05 Jul, 2012
The Reserve Bank of India (RBI) is the regulator for micro finance institutions (MFIs) but there are concerns over whether it has the wherewithal to do so, a top official of the central bank said Wednesday.

Speaking at a function organised by Indian Overseas Bank (IOB) in Chennai on Wednesday RBI Governor D.Subbarao said: "The central government is bringing out a law to govern the MFI and has proposed RBI as the regulator. The concern is whether we have the set up to oversee small MFIs without affecting the quality of supervision."

He said RBI has been working towards reducing the number of public deposit taking entities and whether the MFI's should be allowed to carry out thrift business.

According to Subbarao, owing to complaints of usurious interest rates and their coerce recovery methods, the Andhra Pradesh government brought out a legislation mandating registration of MFI's with the government.

The law also stipulated that the interest collected from borrowers should not exceed the principal.

Referring to RBI's conditions on MFI's like the capital adequacy of Rs.5 crore and the interest cap, Subbarao said most of the companies were unable to adhere to the norms.

However MFIs can expect some good news from the sectoral regulator as it plans to relax norms relating to capital adequacy, net worth and provisioning.

Wondering whether it is advisable for the commercial banks to outsource the small loan business to MFIs and others, he queried whether the the banks are forfeiting their core role.

On the issue of priority sector lending, Subbarao was in favour of trading of priority sector lending certificates, as those banks which do not comply with the 40 percent lending to priority sector, can buy the certificate from banks that have exceeded the stipulated norms.

While foreign banks are in favour of such a mechanism some of the public sector banks have opposed the move, Subbarao said.

Frowning upon the absence of innovation with regard to savings bank account by the banks after RBI de-regulated the interest on savings bank account, he said the experience however has been satisfactory till date.

On the issue of financial inclusion, he said there is long way to go as India lags behind countries like Kenya and Morocco in terms of quality of inclusion.

According to him, financial inclusion needs smart minds and kind hearts and wondered whether this aspect could also be considered while considering an official for promotion.