MFIs – Malegam Report ………..(2)

Most of us would be aware that RBI had set-up a committee under the chairmanship of Shri YH Malegam. The Committee has submitted its report. Major contents of the report including the recommendations are being shared with the SRRF Dialogue e-group. Comments in bold are recommendations. This is the second part of the continuation of the series on the subject….

Further Information about the MFI Sector

§         As at 31^st March 2010 : Number of outstanding loan accounts serviced by MFIs were 26.7 million. (increase of more than 2.5 times within 3 years)

§         Loan amounts outstanding as at 31-3-10 : 18,344 crores from Rs 3800 crores within the same period. An increase of almost 5 times.

Restrictions on Non-MFI Institutions

Aggregate loans of any such institution which cannot be classified as a MFI-NBFC should not exceed 10% of its total assets.

CHARGES BY MFIs

Interest rates & Profit margins for MFIs

Following conditions have been recommended with a view to limit the profit element of MFIs to a reasonable amount, while keeping the incentive for such MFIs to remain in business and provide credit access to people to whom formal credit channels otherwise remain inaccessible.

Recommendations

§          Interest rate on individual loans must not exceed 24%.

§          A ‘margin cap’ of 10% in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of Rs 100 crores and above and a margin cap of 12% in case of MFIs which have an outstanding loan portfolio of upto Rs 100 crores at the beginning of the year.

Other charges

In addition to above, different MFIs could be charging other service charges of one nature or other. In past these have included upfront registration or enrolment fee, loan protection fee, etc. Several MFIs also recover insurance premiums as well as insurance administration charges to cover the risk of borrower’s death. Some MFIs have even resorted to practice of taking security deposit, which is deducted from the loan amount.

Recommendations

§          There should be only three components (i) processing fee (not to exceed 1% of the gross loan), (ii) interest (iii) insurance premium.

§          No security deposits to be recovered and if already collected must be returned.

TRANSPARENCY

To enhance transparency, the committee has given specific recommendations so that borrower is aware of the costs and terms.

Recommendations

§          MFI to issue a card to each borrower, which should give complete details of charges, effective rate of interest, other terms & conditions, details of instalments paid by the borrower, etc.

§          MFI to display effective rate of interest prominently in all its offices and literature, website, etc.

§          No security deposit to be recovered.

…………to be cont’d

Please do initiate your comments / queries to further broaden the understanding of the developments in the sector.