The Reserve Bank has capped interest rates charged by micro finance institutions from small borrowers at 26 per cent, but opened the bank credit line for MFIs which was curtailed following the crisis faced by the sector in October, 2010.
The loan by the banks to MFIs for on-lending to small borrowers will fall under 'priority sector' category if the RBI guidelines are met. The detailed guidelines will be issued soon, the RBI Governor D Subbarao said while unveiling the annual credit policy.
Broadly accepting the recommendations of the Malegam Committee, the RBI has fixed the loan amount for an individual borrower at Rs 35,000 from an MFI. The expert panel had suggested the limit of Rs 25,000 with an interest rate cap of 24 per cent.
"The RBI accepting the regulations recommended by the Malegam Committee has provided a boost to the micro finance sector," SKS Microfinance Chairperson Vikram Akula said.
The CEO of Micro Finance Institutions Network (MFIN) Alok Prasad said the RBI decision has given much-needed regulatory clarity to the MFI sector.
"It represents a big step forward in putting the micro finance industry on the path of recovery," Prasad said.
The sector, which is mostly active in Andhra Pradesh came under cloud in October 2010 following reports of suicides by those trapped in debt paying high interest rates, often as high as 36 per cent, to some MFIs.
The state government then came out with a stringent law which was opposed by the industry. Besides, the governance issues in the sector made the banks wary of financing them, chocking the credit flow to the sector.
"The bank loans to all MFIs including NBFCs working as MFIs on or after April 1, 2011, will be eligible for classification as priority sector loans...," the RBI said.
The central bank said the loans could be disbursed to rural families with an annual income of Rs 60,000 or urban and semi-urban households with income up to Rs 1.20 lakh.
The RBI, however, left it to the borrowers to decide on the repayment period either weekly, fortnightly or monthly.
It has also asked the MFIs to ensure that 75 per cent of the loan extended is utilised by the borrowers for income generation purpose.