Malegam panel recommendations for MFIs

• Suggested that micro finance institutions (MFIs) be allowed to charge a maximum interest of 24 per cent on small loans which cannot exceed Rs.25,000.
• Also pitched for creation of a separate category of non-banking financial companies (NBFC-MFI) for the micro finance sector.
• It further said at least 75 per cent of loans extended by MFIs should be for income generation purposes. It further recommended that a borrower cannot take loans from more than two MFIs.
• These recommendations, the committee said, should be implemented from April 1, 2011.
• The RBI constituted the committee in October last in the wake of allegations of overcharging and using coercive recovery practices by MFIs that led to a spate of suicides in Andhra Pradesh.
• Suggested NABARD should regulate MFIs  in close coordination with the RBI.
• The sub-committee has recommended that bank lending to NBFCs, which qualify as NBFC-MFIs, will be entitled to the 'priority lending' status. With regard to the interest chargeable to the borrower, the sub-committee has recommended an average 'margin cap' of 10 per cent for MFIs having a loan portfolio of Rs.100 crore and of 12 per cent for smaller MFIs and a cap of 24 per cent for interest on individual loans.
• The sub-committee has made a number of recommendations to mitigate the problems of multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. These include: a borrower can be a member of only one self-help group or a joint liability group; not more than two MFIs can lend to a single borrower; there should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery; the tenure of the loan must vary with its amount; a credit information bureau has to be established; the primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management; and the RBI must prepare a draft customer protection code to be adopted by all MFIs.