The Perfect Balancing Act with an Imperfect Outcome: Malegam Committee Recommendations on Microfinance Sector

This paper analyzes Malegam Committee's recommendations for the private sector commercial microfinance industry in India.

The State government of Andhra Pradesh, India issued an Ordinance to regulate MFIs, which triggered a crisis in the microfinance industry. The Indian banking industry stopped credit disbursal to MFIs. The Reserve Bank of India constituted the Malegam Committee to review the definition and practice of microfinance in India, delineate a regulatory framework and make related recommendations. The paper examines Malegam Committee recommendations and presents financial analyses. It makes the following recommendations to the Committee:

• Increasing the limit on annual household income;
• Considering setting different household limits for urban and rural areas and indexing the ceiling to inflation;
• Providing flexibility to MFIs to design their products, while retaining measures that protect borrowers;
• Linking loan caps to borrowers repayment capacity;
• Revisiting minimum capital requirement for nonbanking financial companies and MFIs;
• Revisiting calculations of operating efficiency and capital adequacy using a large sample of MFIs and making pricing calculations based on the new calculations;
• Moderating applicability of provisioning norms with interim relief for MFIs affected by the crisis.