Indian Reserve Bank panel seeks changes to microfinance

Drastic changes to the functioning of microfinance institutions have been recommended by a panel appointed by Reserve Bank of India. The Malegam panel has proposed a cap of 24% on the interest charged and an upper limit of 25,000 Rupees ($549; £344) on individual loans. It suggests that not more than two institutions should be allowed to lend to the same borrower. Its has advised that loan tenure must vary with its amount.

The operating style of many microfinance institutions (MFIs) has been criticised of late. There have been accusations of charging unreasonable fees and using loan sharks to collect outstanding payments. This has led many to raise concerns that institutions are doing more damage to the poor, rather than providing a helping hand. In its report, the panel made an effort to address these concerns. It proposed a transparency in charges, with an MFI allowed to levy only three charges – processing fee, interest and insurance charge.It also said that that there should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery. In case of late payments, the onus to avoid using coercive recovery methods has also been put on the lenders.

The committee has asked the the Reserve Bank to prepare a draft Customer Protection Code to be adopted by all MFIs. Its suggestions also include the setting up of a proper grievance redressal procedures and establishment of ombudsmen to settle any disputes. While recognising the need to protect borrowers, it is has cautioned that if the recovery of funds is affected, MFIs will be reluctant to lend and the needy will suffer. – BBC