Effects of Reserve Bank of India (RBI) Regulations on Public Sector Lending for Microfinance Institutions (MFIs)

This study presents findings from interviews with 32 Indian MFIs in 2011 on their response to the Malegam Committee recommendations and the new Reserve Bank of India (RBI) regulations. It discusses practitioners' views about the strengths and weaknesses of the RBI guidelines. The paper highlights MFIs' current funding situation and discusses how they have changed their business strategies to fit into the regulations.

Study findings demonstrate mixed MFI reactions towards the recommendations, with more than half stating that the Malegam Committee recommendations and the RBI regulations have a positive approach towards the microfinance sector. MFIs stated that:

• They were relieved by the developments taking place in regulating MFIs, but were concerned about interest rate and margin caps;
• The Malegam Committee recommendations created confusion among the bankers resulting in reduced funding for MFIs;
• They had to ensure survival by changing their business strategies, closing branches, laying off employees, and enrolling as many clients as possible before March 2011;
• Maximum loan amount of Rs. 50,000 may not always accommodate clients financial needs;
• Regulating the price of microfinance loan products may not help clients in the long run even though there is a need for fairness and transparency in loan transactions.