Microfinance in India: Priority Sector no more?

After soliciting feedback from various stakeholders on the Malegam report recommendations, the RBI has released a policy statement that says –
that bank loans to all MFIs, including NBFCs working as MFIs on or after April 1, 2011, will be eligible for classification as priority sector loans under respective category of indirect finance only if the prescribed percentage of their total assets are in the nature of “qualifying assets” and they adhere to the “pricing of interest” guidelines to be issued in this regard;

• that a “qualifying asset’’ is required to satisfy the criteria of

(i) loan disbursed by an MFI to a borrower with a rural household annual income not exceeding ` 60,000 or urban and semi-urban household income not exceeding ` 1,20,000;
(ii) loan amount not to exceed ` 35,000 in the first cycle and ` 50,000 in subsequent cycles;
(iii) total indebtedness of the borrower not to exceed ` 50,000;
(iv) tenure of loan not to be less than 24 months for loan amount in excess of ` 15,000 without prepayment penalty;
(iv) loan to be extended without collateral;
(v) aggregate amount of loan, given for income generation, not to be less than 75 per cent of the total loans given by the MFIs; and
(vi) loan to be repayable by weekly, fortnightly or monthly instalments at the choice of the borrower;

Some of the above proposals are way off from what the commercial for-profit microfinance industry in India is used to. Choice of repayments with the borrower (that will kill the plain vanilla offerings and increase operating costs)? Total indebtedness of about $1200 (by many accounts, its already way above these limits for many clients)? 75% of the portfolio be income generating loans (that should be fine – some smart labeling is all it takes)? $1200 as a cap on a single loan size (will destroy the upcoming individual loans market)? The NBFC-MFI industry in India is not going to be happy about this.

This though is an interesting move by the RBI. I may be reading this wrong – but the report suggests that only loan portfolios that meet the above requirements can be classified as Priority Sector Loans. Which means that financial institutions can continue lending as they do at present – just that for the banks, those loans won’t count as priority sector loans anymore. Will the financial institutions decide that there is enough profits in microfinance even if their loans cannot be designated as priority sector loans?

2 thoughts on “Microfinance in India: Priority Sector no more?

  1. Thanks for your comment, Swati.
    Reg the question of impact – yes, its an unanswered question and there is much more research to come before we have an answer. On the other hand though – if microfinance is a successful commercial proposition, would the financial institutions involved in it care about impact?


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