Reserve Bank of India to MFIs: Shape Up or Face Music

Tuesday, February 16, 2010

HYDERABAD: India’s booming microfinance segment is under the scanner, with the Reserve Bank of India (RBI) issuing a veiled warning that it could
be taken off the priority sector lending list of banks if the industry fails to improve its governance standards.

This was spelt out at a meeting in late January between senior RBI officials, representatives of Sa-Dhan-the association of Indian microfinance institutions (MFIs)-and some senior MFI managers from Karnataka, West Bengal and Andhra Pradesh.

The RBI officials reportedly told MFI executives that the central bank was aware of the extent of benami loans being given by MFIs, the practice of writing off bad loans and sloppy corporate governance in some of the entities, all of which could have their impact years down the line.

Total outstanding loans issued by the Indian microfinance segment stood at Rs 11,700 crore in 2009, a 13-fold increase from the Rs 897 crore it was worth in 2005.

Many MFIs have generated big returns, often as much as 20-30%, to the promoters and private equity players, who have stepped in as financial investors, looking for an exit in about four years. For instance, Spandana, a Hyderabad-based MFI with current outstandings of Rs 3,061 crore and growing at 100%, is close to wrapping up a deal with Temasek Holdings, where the former will pick up close to a 10% stake for Rs 200 crore.

Currently, all loans to MFIs are categorised as priority sector lending that banks have to fulfil as part of their social obligation and regulatory requirement. Losing priority sector status could snap credit lines that MFIs have with banks.

Source: Economic Times (link opens in a new window)