Microfinance institutions operating as non-banking finance companies may soon be able to breathe a bit easier.
The Reserve Bank of India will relax some prudential norms governing the NBFC-MFIs, said a top central banker.
Following feedback received from stakeholders, the RBI will amend some directions governing MFIs, said Mr P. Vijaya Bhaskar, Executive Director, RBI, at a seminar organised by the Microfinance Institutions Network (MFIN). The directions were issued last December.
Integral part
Mr Vijaya Bhaskar assured the MFI representatives that their institutions were an integral part of the RBI’s financial inclusion programme.
According to Mr Alok Prasad, CEO, MFIN, stakeholders (the MFIs) have sought relaxation in the provisioning requirement for their loan exposure in Andhra Pradesh.
After the Andhra Pradesh Government passed a law putting restrictions on lending and recovery by MFIs in late 2010, small value loans aggregating about Rs 7,500 crore turned sour, entailing huge provisioning.
Level-playing field
MFIs also want a level playing field vis-à-vis banks. While banks are neither subject to any interest rate cap nor margin cap on lending, MFIs are subject to a margin cap of 12 per cent and an interest rate cap of 26 per cent on individual loans, said Mr Prasad.
Elaborating of the deleterious impact that the Andhra MFI legislation has had on MFIs, Mr Vijay Mahajan, Chairman, BASIX, said his company’s loan portfolio drastically shrunk from a peak of Rs 2,000 crore in 2010 to Rs 125 crore now.
The BASIX chief said it will be wrong to blame only the Andhra Pradesh Government for the woes of the MFI sector. The ‘decision makers’ in Mumbai were also responsible for their current state of affairs.
Mr Mahajan said he has legally challenged the Andhra Pradesh legislation as it violates the Constitution.
Moral hazard
Since loan repayments are not forthcoming due to moral hazard (in this case, people’s representatives were encouraging borrowers not to repay), this is nothing but financial vandalism and should be made punishable under the Indian Penal Code, he explained.
A moral hazard is a situation where the actions of one party may change to the detriment of another after a transaction has taken place.