The Reserve Bank of India-appointed YH Malegam committee has recommended an interest rate cap of 24% on loans to individuals by microfinance institutions or MFIs.

For monitoring compliance with regulations, the committee has recommended a four-pillar approach with responsibilities shared by the MFI, industry associations, banks and the Reserve Bank.

The panel is also of the view that a separate category of a non-banking finance company (NBFC) be formed that would engage in microfinance. These NBFC-MFIs should be exempted from State Money Lending Acts. Moreover, if the recommendations are accepted, the need for the Andhra Pradesh Micro Finance Institutions (Regulation of Money Lending) Act ?will not survive?. The panel, which reviewed the proposed Micro Finance (Development and Regulation) Bill 2010, has recommended that entities governed by the proposed Act should not be allowed to do business of providing thrift services. This means that NBFC MFIs cannot mobilise deposits and they cannot operate as agents of banks or business correspondents. They can only engage in lending.

?With regard to the interest chargeable to the borrower, the sub-committee has recommended an average ?margin cap? of 10% for MFIs having a loan portfolio of Rs 100 crore and of 12% for smaller MFIs and a cap of 24% for interest on individual loans,? said the report. To ensure that the interest rate charged is transparent, the committee has proposed that the MFI can levy only three charges, namely, processing fee, interest and insurance charge.

To qualify as a NBFC-MFI, the sub-committee has stated that the NBFC would have to provide financial financial services pre-dominantly to low-income borrowers, with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks? and which further satisfies the regulations specified in that behalf.

Further, bank loans extended to these NBFC-MFIs should continue to be treated as ?priority lending?, said the committee. It has also been prescribed that these NBFC-MFIs should hold 90% of their total assets other than cash and bank balances and money market instruments in the form of qualifying assets. Such NBFCs could lend to families with an annual income of Rs 50,000 and an individual loan ceiling of Rs 50,000 has been prescribed for a single borrower. Further, the committee recommends that 75% of the loans given by the MFI would have to bee for income-generating purposes.

On the loan repayment mechanism, the committee feels that the choice of a weekly, fortnightly or monthly repayment schedule should be left to the borrower to suit his circumstances. ?MFIs should be encouraged to move to a monthly repayment model, freedom should be given to the MFI to fix a pattern of repayment which can be weekly, fortnightly or monthly depending upon the nature of the loan.?

The Malegam committee was set up in October, 2010, under the chairmanship of noted chartered accountant YH Malegam to examine the functioning of microcredit lenders in India and their regulation. Other members on the panel are Kumar Mangalam Birla, Shashi Rajagopalan and UR Rao ? members on the board of the central bank ? and RBI deputy governor KC Chakrabarty. The MFI sector has come under the regulatory and political glare after the alleged suicide of some farmers in Andhra Pradesh after some MFI agents allegedly used force to recover dues.

The AP government later passed a Microfinance Bill which bought lending by MFIs in the state to a standstill.