Malegam Sub-committee Report on MFIs

The Malegam sub-committee submitted its report to the RBI on 19 January 2011. The Reserve Bank of India committee laid down stricter profitability and loan caps, and higher capital requirements to regulate microfinance institutions. The committee’s measures breathed life into a sector currently plagued by poor funding and accusations of improper governance. The road map as suggested by the committee limited the total loans to an individual to Rs 25000, capped the interest rate at 24%, and suggested that bank loans to MFIs should continue to be treated as priority sector loans but with a higher capital adequacy ratio of 15%. The repayment tenure should be less than 12 months for loans below Rs 15000 and less than two years for loans above Rs 15000. The sub-committee also recommended that borrowers should be allowed to choose a weekly, fortnightly or monthly repayment schedule.

With an objective to maintain solvency for MFIs, the report suggested the institutions should maintain an aggregate provision for loan losses which shall be the higher of 1% of current loan portfolio or 50% of the aggregate loan instalments that are overdue for 90-180 days. Aggregate provision for loan losses should be 100% of aggregate loan instalments that are overdue for 180 days or more. The report said one or more domestic social capital funds be created after talks with markets regulator Securities & Exchange Board of India as it was necessary to widen the funding sources of MFIs. The report highlighted that all for-profit MFIs which are regulated by RBI, should be clubbed under a new category called NBFC-MFIs, with a minimum net worth of Rs 15 crore. The report also suggested a margin cap of 10% for MFIs with loan portfolios above Rs 100 crore and a cap of 12% for those with a loan portfolio below Rs 100 crore. Moreover more than two MFIs can’t lend to the same person.

The report specified that any MFI that doesn’t comply with the norms being set for the sector should be denied priority sector lending. The report finally mentioned that NBFC-MFIs should be exempted from the purview of the Moneylending Acts, and that Andhra Pradesh should withdraw its controversial Andhra Pradesh Micro Finance Institutions (regulation of moneylending) Act.

RBI had constituted the panel in October 2010 in the wake of complaints about corporate misgovernance, overlending and coercive collections by some MFIs. The industry came under pressure after suicides amongst microfinance borrowers were reported in Andhra Pradesh, prompting the state government to pass an ordinance that made it very hard for MFIs to lend or collect money.