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    Recommendations of Malegam Committee On Micro Finance Sector

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    Nidhi Bothra
    The Reserve Bank of India established a committee chaired by YH Malegam to address issues in the microfinance sector. The committee reviewed regulations on interest rates, lending practices, and other issues. It recommended creating a new category of non-banking financial companies called NBFC-MFIs, subject to qualifications like maintaining 90% of assets in qualifying loans. The committee also recommended capping interest rates, establishing credit bureaus, and improving transparency and customer protection. Its goal was to balance social objectives with sustainability in the microfinance sector in order to achieve greater financial inclusion.

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    Recommendations of Malegam Committee On Micro Finance Sector

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    Nidhi Bothra
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    The Reserve Bank of India established a committee chaired by YH Malegam to address issues in the microfinance sector. The committee reviewed regulations on interest rates, lending practices, and other issues. It recommended creating a new category of non-banking financial companies called NBFC-MFIs, subject to qualifications like maintaining 90% of assets in qualifying loans. The committee also recommended capping interest rates, establishing credit bureaus, and improving transparency and customer protection. Its goal was to balance social objectives with sustainability in the microfinance sector in order to achieve greater financial inclusion.

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    Recommendations of Malegam Committee on Micro Finance Sector

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    The Reserve Bank of India established a committee chaired by YH Malegam to address issues in the microfinance sector. The committee reviewed regulations on interest rates, lending practices, and other issues. It recommended creating a new category of non-banking financial companies called NBFC-MFIs, subject to qualifications like maintaining 90% of assets in qualifying loans. The committee also recommended capping interest rates, establishing credit bureaus, and improving transparency and customer protection. Its goal was to balance social objectives with sustainability in the microfinance sector in order to achieve greater financial inclusion.

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    208 views3 pages

    Recommendations of Malegam Committee On Micro Finance Sector

    Uploaded by

    Nidhi Bothra
    The Reserve Bank of India established a committee chaired by YH Malegam to address issues in the microfinance sector. The committee reviewed regulations on interest rates, lending practices, and other issues. It recommended creating a new category of non-banking financial companies called NBFC-MFIs, subject to qualifications like maintaining 90% of assets in qualifying loans. The committee also recommended capping interest rates, establishing credit bureaus, and improving transparency and customer protection. Its goal was to balance social objectives with sustainability in the microfinance sector in order to achieve greater financial inclusion.

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    Overview of the Malegam Committee report on the Microfinance 

    Sector: Is it a new dawn? 
    Nidhi Bothra
    nidhibothra@rediffmail.com

    Reserve Bank of India had set up a sub-committee under the chairmanship of Shri Y.H
    Malegam, to address the several issues concerning the Microfinance Sector and RBI released the
    report of recommendations by the sub-committee on 19th January, 2011. The sub-committee was
    to review the scope and objectives of regulations governing MFIs with regard to interest rates,
    lending and recovery practices, applicability of existing money lending legislations, need for
    grievance redressal machinery and other issues concerning the sector.

    Microfinance industry had recently come under the scanner when the Andhra Pradesh
    government passed an Ordinance calling the borrowers to stop paying their loans, making it
    illegal for the micro lenders to ask for weekly repayments and also required them to get a no
    objection from the local authorities before providing for a second loan to a borrower, bringing a
    jolting halt to the Rs. 20,000 crore industry in India and exposing the inherent problems in the
    sector.

    Sub-committee recommended creation of a separate category of NBFCs, NBFC-MFIs, providing


    short term, and unsecured loans to the low income borrowers for income generating activities.
    Some of the qualifications for NBFC-MFIs are:

    1. The NBFC-MFI to hold not less than 90% of its total assets (other than cash and bank
    balances and money market instruments) in the form of qualifying assets. The sub-
    committee also mentions that a non NBFC-MFI cannot have loans to the microfinance
    sector exceeding 10% of its total assets.
    2. Individual ceilings to a loans to a single borrower of Rs.25,000 is applicable.
    3. Not less than 75% of the loans given by the MFI should be for income-generating
    purposes.
    4. There is a restriction on the other services to be provided by the MFI which has to be in
    accordance with the type of service and the maximum percentage of total income as may
    be prescribed.
    5. The report recommends all NBFC-MFIs to have a minimum net worth of Rs. 15 crores.

    Some of the recommendations of the committee are: 


    1. A borrower can be a member of only one Self-Help Group (SHG) or a Joint Liability
    Group (JLG). Not more than two MFIs can lend to a single borrower. Tenure of the loan
    to vary with amount.
    2. There should be a minimum period of moratorium between the disbursement of loan and
    the commencement of recovery.
    3. Problem of ghost borrowers be addressed by sanctioning and disbursement of loans from
    a central location.
    4. A Credit Information Bureau has to be established to avoid multiple lending and over
    borrowing.
    5. The primary responsibility for avoidance of coercive methods of recovery must lie with
    the MFI and its management. Regulators to monitor, MFIs have a proper code of conduct
    for field staff for prevention of coercive methods of recovery.
    6. The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all
    MFIs. All MFIs must observe a specified Code of Corporate Governance.
    7. There must be grievance redressal procedures and establishment of ombudsmen may be
    recommended by RBI to lead banks.
    8. For loans not exceeding Rs. 15,000, the tenure of the loan should not be less than 12
    months and for other loans the tenure should not be less than 24 months, however there
    would be no preprayment penalty.
    9. MFIs can charge insurance premium, interest charges and loan processing fees which
    should not exceed 1% of the gross loan amount. Also only the actual cost of insurance
    should only be recovered.
    10. To improve transparency in providing loan and MFIs should make borrowers aware of
    the effective interest rate charged, this would enable comparability.
    11. Provisioning of loans should not be maintained for individual loans but an aggregate
    provision for loan losses should be maintained by the MFIs.
    12. Disclosures to be made in the financial statements of MFIs with regard to the outstanding
    loan pools securitized.
    13. Bank lending to MFIs would continue to be entitled to priority sector status. A cap
    of 24% is provided for interest on individual loans and an average margin cap of
    10% for MFIs having loan portfolio of Rs.100 crores and above and cap of 12% for
    smaller MFIs.
    14. Sub-committee also recommended that entities governed by the proposed Act, (Micro
    Finance (Development and Regulation) Bill 2010 should not be allowed to do business of
    providing thrift services.

    The report also recommends that all the recommendations must be accepted and implemented by
    1st April, 2011.

    The thought behind microfinance is to assist the poor to work their way out of poverty as the
    traditional sources of funding is not available to them. Microfinance provides easy and cheap
    access to loans, without the need for collateral. The constraints of catering to this sector are high
    transaction costs, no understanding of banking amongst the borrowers and need for the lenders to
    handhold the borrowers for generating income, savings and repayments.
    The intent of the report is to ensure that right balance between the pursuit of social objective and
    interest of shareholder is maintained through responsible financing. MFIs cater to the vulnerable
    section of the society and are pivotal for achieving financial inclusion. The recommendations of
    the committee work towards achieving the purpose of financial inclusion in a proper business
    environment. The pertinent question here is will these recommendations resolve the grappling
    issued facing the industry today and achieve its purpose of financial inclusion yet being
    sustainable?

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