Planning body panel seeks RBI intervention to end MFI crisis
NEW DELHI: Planning Commission deputy chairman Montek Singh Ahluwalia has written to Prime Minister Manmohan Singh, seeking intervention by the Reserve Bank of India (RBI) to stave off the snowballing crisis that India's microfinance industry is battling in Andhra Pradesh, even as the southern state is set to introduce a Bill in the winter session of the state assembly to curb alleged exploitation of rural borrowers by microfinance institutions (MFIs).
A PTI report on Wednesday, quoting a senior bureaucrat, said there will not be any cap on interest rates charged by MFIs, but the ordinance, which was promulgated in October, will be "introduced as it is".
"There will not be any modification in the Bill. We are very firm on curbing the coercive methods in recoveries," the state's principal secretary (panchayat raj and rural development) R. Subrahmanyam, told PTI.
Ahluwalia, who wrote to the Prime Minister in late November, has described the ordinance as "draconian" and said: "If implemented as it stands, it will lead to the collapse of the MFI sector."
The state promulgated the ordinance on 15 October and the definition of MFIs in the ordinance not only explicitly refers to non-banking financial companies (NBFCs) regulated by RBI, but also all companies engaged in any business of finance to low-income households. This means it effectively covers all commercial banks, since banks are companies under the Companies Act, 1956, and they lend money to low-income clients.
According to Ahluwalia, since MFIs are NBFCs, and regulated by RBI, "the state government should not have acted in the manner it did" and "the lead in taking corrective steps should have been taken by RBI".
Stating that the financial sector "cannot be made hostage to arbitrary administrative action", Ahluwalia said, "we should urge RBI to step forward as the sole agency to regulate and control MFIs."
RBI deputy governor Subir Gokarn on Tuesday said MFIs are under stress, but there is no threat to the system. On the sidelines of a programme on financial inclusion, organized by Kolkata-based United Bank of India, Gokarn told reporters MFIs play an important role in the banking regulator's financial inclusion strategy.
RBI has constituted a panel, headed by chartered accountant Y.H. Malegam, to look into these issues and the panel is expected to submit its report by end of January. -PB News