Victoria White

Blog Post

<em>&gt; Posted by Victoria White</em>
<img class="alignright size-medium wp-image-2644" title="India" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2011/02/india.png?w=300" alt="" width="210" height="210" />The much-awaited recommendations of the Malegam Committee, a sub-committee of the Reserve Bank of India, have been released and have stirred up a lot of dust and anxiety among national and international stakeholders.  The proposal certainly contains a number of recommendations that could strengthen the industry, such as the creation of a special regulatory category for Non-Bank Financial Companies (NBFCs) that specialize in microfinance, as well as a call for more transparency and improved governance.
Yet, many of the recommendations, if adopted by the RBI, will hurt the industry and, most importantly, its clients.
The committee’s approach is to recommend a flood of new rules: a loan size cap of R25K (US$570), a R50k ($1,200) annual household income limit, and an interest rate cap of 24% per loan plus 1% processing fee. These limitations would put microfinance institutions into a mono-product straitjacket. The only product they could market would be a small group loan, with limited term options, and limited uses. In fact, this mono-product approach is one of the causes of the problems in Andhra Pradesh, because lenders over-sold exactly this kind of loan.
The Malegam Committee’s recommendations ignore the range of financial needs of low-income households. Under these restrictions, providers would be unable to offer more client-focused services with terms and conditions designed to meet client needs, such as individual loans, which would involve slightly larger loans. If adopted, the proposals would also chill the development of other financial services, such as savings and insurance, which are currently not offered by Indian MFIs. Innovation and diversification to provide customer-focused products and services would be off-limits.
It will ultimately be the low-income families, the very groups the Malegam Committee wanted to protect, who will suffer most and be deprived of the benefits of a full range of quality microfinance products.
Anyone who hopes for worldwide financial inclusion with India’s industry in the lead will probably feel more than a little concern at the Malegam recommendations.
<i>For more information, <a href="http://bit.ly/FI2020signup">sign up for updates</a> from the Financial Inclusion 2020 campaign.</i>

Victoria White

Latest by Victoria White