Will take action against errant MFIs after Malegam report: RBI

"We have appointed a committee headed by Y H Malegam to look into the activities of MFIs. After the report is submitted, action will be taken countrywide," RBI Governor D Subbarao told reporters after meeting West Bengal Chief Minister Buddhadeb Bhattacharya here.

MFIs have come under heightened scrutiny by the authorities over allegations of unfair lending practices, he said.
While some MFIs have been accused of indulging in irregular practices like multiple lending, others allegedly sanctioned loans for non-priority purposes, he said, adding that the coercive loan recovery practices of some microfinance institutions were also under the scanner.

"Let the Malegam report come. We will then take action," he said. The strong-arm tactics employed by MFIs to recover loans offered at exorbitant interest rates were blamed for a spate of suicides in Andhra Pradesh, prompting the state government to come out with an ordinance to rein in the activities of these institutions.

Since MFIs do not have access to deposits, they take loans from other lenders like banks and charge interest of as much as 30 per cent on loans taken by their customers, most of whom are poor rural workers engaged in activities in the unorganised sector.

This has hampered the loan recovery activities of even bonafide MFIs in Andhra Pradesh. Consequently, bank funding to these MFIs has dried up. The situation prompted an umbrella body representing MFIs to recently warn that microfinance lending activities across the country will be "dead, absolutely" by January 1 unless banks release fresh credit to the cash-strapped sector.

If the current severe credit crunch continues till the end of December, "There will be no microfinance in 2011... Come first January, we are dead, absolutely... it will be finished," the president of the M-Fin Network, Vijay Mahajan, said on the sidelines of the recent Bancon 2010 banking conference in Mumbai.

Mahajan had said the ordinance led to massive defaults by borrowers in AP -- with over 90 per cent of borrowers not paying their EMIs for over a month -- forcing the industry to stop issuing fresh advances. The industry is now worried the trend will spread to other states, he had said.

The Centre also plans to table a Bill on MFIs once the Malegam report comes out.

On the issue of financial inclusion, Subbarao said the national goal is to provide banking services to 100 per cent of citizens living in villages with a population of more than 2,000 by March, 2012.

In West Bengal alone, 7,486 such villages are yet to be covered under the banking system, he noted. "Other states have done well (and) West Bengal has done reasonably well," Subbarao said.

Regarding the imposition of a cap on the interest rates charged by MFIs, he said the issue was on the agenda. For setting up bank branches, there was a need to improve road and digital connectivity, Subbarao said.

Till September, 2010, only 324 villages were brought under the banking services net in West Bengal. The target for the entire 2010-11 fiscal is 2,581 villages. Subbarao said the RBI and state government would promote the goal of financial inclusion expeditiously under the State Level Bankers Committee (SLBC) programme.

Referring to the credit-deposit ratio of West Bengal, the RBI governor said it was less than the all-India average. Asked to comment on the state's financial condition, he said it was not a crisis of big proportion. The state is accessing all the RBI windows for funds, he said.

He said that he has discussed the matter with both the Chief Minister and State Finance Minister Asim Dasgupta, who was also present at the meeting. "I have promised both of them on how the CD ratio can be improved by enhancing credit flow to the priority, MSME (sectors) and self-help groups," Rao said.

Finance Minister Asim Dasgupta also said there was a need for regulation of MFIs operating in West Bengal. "We will also study all the 21 MFIs operating out of the state," he said.