Monday, February 05, 2007

Create legislation for setting up micro-credit banks - Yunus

Yunus has asked India to set up legislation allowing creation of micro-credit banks.

As of now, micro-credit institutions come under NBFC (Non-banking finance corporations) and as such are severely restricted in their operations including their ability to collect deposits and access low-cost funds. Reported in Financial Express:
Although India is booming, it cannot neglect those who are left without credit availability. He made an obvious reference to the Tata-Corus deal and said, "One side of India is looking up and the other not catching up. Grameen Bank, which lent to 7 million poorest of the poor in Bangladesh, has set the target of reaching out to every household by 2010. On these lines, India should try to reach out to the poorest of the poor," he opined. Yunus praised the self-help group model for providing credit linkage but asserted that it does not cover all poor but other segments also.
SHG model in India is quite restricted and it is important for India to come up with legislation for micro-credit banks. However, I have a feeling that there is no lobby pushing for this and as such no one is going to look at this space for a long time to come.

Also reported in Economic Times is that RBI's CS Murthy that RBI is not for creating banking regulations for micro credit institutions since the regulations are stringent and micro credit institutions may not be able to handle that. This argument sounds dodgy. One can always come up with reasonably relaxed norms specifically for micro credit banks, if one wants it.

Yunus has also suggested that micro credit institutions be regulated with an upper limit for the rate of interest on lending. However the formula he is proposing may have to be looked at carefully. A regulator like TRAI who constantly looks at the prevailing situation and modifies the limit on rate of interest could be useful rather than strict legislation for the upper limit.

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