Finance Minister Pranab Mukherjee on Monday announced creation of an equity fund of Rs. 100 crore (Rs. 1 billion) for micro finance institutions, which will help the cash-strapped sector to continue lending to small borrowers.Mukherjee, in his 2011-12 Budget speech, announced the creation of "India Microfinance Equity Fund", with the state-run Small Industrial development bank.
"The micro finance institutions have emerged as an important means of financial inclusion. Creation of a dedicated fund for providing equity to smaller MFIs would help them maintain growth and achieve scale and efficiency in operations," Mukherjee said.
The MFI sector had come under liquidity crunch after banks refused lending to them following a string of farmers' suicide cases in Andhra Pradesh and the introduction of an ordinance in the state, now passed into an act, to regulate the MFIs operations.
They were allegations MFIs were charging exorbitant interest rates and using strong-arm tactics to recover the loans.
They were allegedly charging interest rates of over 30 per cent, which along with their reported coercive recovery tactics, led to Muhammad Yunus, the Bangladeshi economist and founder of the Grameen
Bank, recently describing them as "loan sharks".
In October 2010, the Reserve Bank constituted the Malegam Committee to study the state of MFIs in the country.
The committee, which submitted its report on January 19, suggested among other things capping interest rate at 24 per cent for MFI loans.
The committee also suggested that small loans cannot exceed the ceiling of Rs.25,000 (Rs. 250 billion) and asked for creating a separate category of non-banking financial companies for the MFI sector.
As of March 31, 2010, there were 1,659 MFIs availing the total credit of Rs. 13,955 crore (Rs. 139.55 billion) from the banking system.
The sector currently provides credit to over 100 million households.
The pre-Budget Economic Survey had asked the government to take steps to ensure borrowers understood the contract when they borrowed from micro finance institutions.
"Government has to take measures to ensure that MFIs make the terms of contract transparent to the borrowers. This is more important than setting caps on interest rates and other restrictions on the terms of the contract," it had said.
