RBI Relaxes Lending Rules for Bank Loans to Microfinance Institutions

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Jan. 20 – The Reserve Bank of India temporarily relaxed lending rules for bank loans to microfinance institutions, allowing banks to continue offering loans to the ailing sector.

The RBI will, for a short period of time, permit banks to classify loans that might be delinquent as standard to introduce some liquidity into the industry.

“The fact that the RBI is making an exception on behalf of MFIs (microfinance institutions) and taking special steps to support the industry is a good sign from a direction point of view,” said Anurag Agarwal, senior vice president at Intellecap, a consulting firm located in the Indian state of Andra Pradesh, where over 30 percent of all microfinance loans are directed.

Andra Pradesh’s state government introduced a series of regulations on the sector in October 2010 that cut back on MFI activity in the state.

India’s central bank and finance ministry have both spoken up to support the sector.

“The Sub-Committee has cautioned that while recognizing the need to protect borrowers, it is also necessary to recognize that if the recovery culture is adversely affected and the free flow of funds in the system interrupted, the ultimate sufferers will be the borrowers themselves,” an RBI statement said.

Some critics have argued that microfinance companies should not turn a sizable profit on a loan, while others say that profits allow lenders to lend to poorer borrowers with worse credit.