The Hindu : Business : RBI panel favours lower FDI entry norm for MFIs

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Friday, Jun 03, 2005

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Business

RBI panel favours lower FDI entry norm for MFIs

Special Correspondent

Direct finance from NABARD suggested

MUMBAI: Sourcing international funds for micro finance institutions (MFIs), a Reserve Bank of India (RBI) internal panel recommended to the government to consider reducing the threshold limit for foreign direct investment (FDI) for non-banking finance companies (NBFC)-micro finance institutions (MFIs) from $500,000 to $100,000. "Alternatively, such liberal dispensation may be considered for investments by non-resident Indians (NRIs) in this sector", the panel suggested.

At present, the capitalisation norms fixed for FDI is $500,000 (about Rs. 2.18 crore at current exchange rate) for investment up to 51 per cent of the equity capital and the minimum amount further increased to $7.5 million, if a stake of up to 100 per cent is desired. In the case of the NBFC-MFIs the entry level capital has been prescribed at Rs. 2 crore.

"A foreign investor who is willing to put in smaller amount in the micro finance sector to gain some experience may find such norms financially unattractive. To encourage foreign equity participation in NBFCs, so that they are able to meet the entry level capital requirements, particularly in those areas where the spread of MFIs has not been encouraging, it is suggested that the minimum FDI requirement may be lowered to $100,000 (about Rs. 44 lakh)", the panel stated.

It also recommended direct finance from the National Bank for Agriculture and Rural Development (NABARD) for these entities. "The micro finance portfolio of the regulated MFIs may be made eligible for direct finance from NABARD and a line of credit may be extended by NABARD to provide liquidity assistance in view of the co-variant nature of credit risk of the MFIs."

On micro-insurance schemes, it recommended that the Insurance Regulatory and Development Authority (IRDA), in consultation with NABARD, Small Industries Development Bank of India (SIDBI), MFI Associations, Indian Banks Association (IBA) and private and public sector insurance companies may examine the scope of expanding the existing micro-insurance schemes and introduction of other innovative insurance products, including group insurance, to take care of the risks faced by the self help groups and micro entrepreneurs as well as lending banks.

The concerns and issues arising out of bank-MFI partnership model may be studied by IBA and a model scheme be formulated for adoption by banks. The government, RBI, NABARD and banks may take effective steps to overcome the shortcomings in SHG-bank linkage models.

Accounting standards for SHGs and NGOs may be developed.

The panel is against fixing a ceiling on interest rates charged for credit to MFIs.

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