Out of the Shadows, Into the Spotlight

May 4, 2011

The Reserve Bank of India has set an interest rate cap of 26% on micro-loans for amounts up to 50,000 Rupees (or about $1,127). In a statement released yesterday, the Indian Central Bank also set a 24-month limit for the repayment of loans in excess of 15,000 rupees (just over $338), with no prepayment penalties and options for repaying weekly, fortnightly or monthly

Additionally, the RBI stated that priority consideration should be given to loans to rural households with annual income up to 60,000 Rupees, as well as to urban and semi-urban households earning up to 120,000 Rupees. This in effect opens commercial bank money spigots to the country's microfinance sector - those operating as microfinance institutions and non-MFIs. Commercial banks in India are required to apportion 40% of lending to sectors designated by the government as priority.

The microfinance sector has come under increased scrutiny, especially in India and Bangladesh (the birthplace of microfinance), after complaints surfaced last year about high interest rates, aggressive collection tactics and poor people drowning in debt.

The RBI's statement yesterday follows closely recommendations published earlier this year by a RBI work group. Other recommendations included limits on numbers of loans to individual households, creation of microfinance credit bureaus and improved mechanisms for addressing customer grievances.

CGAP Updates Guidelines

Last month, CGAP, the microfinance think tank housed in the World Bank, released a working draft of its latest take on microfinance oversight.

The Guide to Regulation and Supervision of Microfinance is a "consensus document" that was first released in 2003, and is intended as a resource for policymakers. CGAP said that it relied on experts in the field and existing supervisory principles (such as those established by the Basel Committee on Bank Supervision) in drawing its conclusions and recommendations.

The updated guide builds on the original and takes into account developments in the field that require attention. Some of the new topics include: consumer protection, branchless banking and microinsurance.

A copy of the Guide to Regulation and Supervision of Microfinance is available for download at the CGAP Web site. Interested parties have untl May 15 to file comments on the proposed update.

50 million American households are considered "unbanked" - they have no relationships with federally insured financial institutions