RBI forms a panel to examine MFIs' functioning

Reserve Bank of India announced on Friday constitution of a sub-committee to look into the functioning of Micro Finance Institutions, as they have drawn flak for using strong arm tactics to recover loans.

MFI tactics have even prompted Andhra Pradesh Cabinet to approve an ordinance to rein them in.

"We have constituted a sub-committee to look into the functioning of MFIs sector and what bearing they have on RBI policy to take further action," RBI Governor D Subbarao told reporters in Chandigarh after the meeting of the central bank board.

"We have discussed the evolving situation of MFIs sector and as part of our responsibility we are also looking at what is happening in the financial sector", he said. However, he did not commit to come out with any regulations to deal with MFIs.

"Regulations (for MFI)… I cannot really speculate on that."

RBI's move has come a day after the Andhra Pradesh Cabinet approved an ordinance on Thursday, providing for three year sentence and Rs 100,000 penalty for MFIs harassing borrowers for recovery of loans.

The ordinance is aimed at regulating the functioning of MFIs as well as at checking their strong arm tactics to force borrowers to repay the loan.

Under it, the MFIs are required to register themselves, and the renewal would depend on their track record.

"We discussed the Andhra Pradesh Government ordinance approved by the Cabinet on Thursday in board and what really falls in RBI (purview)," Subbarao said.

Stating that RBI regulates Non-Banking Finance Company, he however said that there are a vast number of companies under MFI sector falling out of the purview of apex bank.

"We discussed implications of development happening in MFI sector", the governor said, adding that RBI does not regulate the interest rate of a large number of MFIs.

The RBI move also follows the sacking of SKS Microfinance chief executive officer Suresh Gurumani by the board, raising corporate governance issues in the MFI sector.

A bill to regulate MFIs is being prepared to be tabled in Parliament.

On Thursday, Financial Services Secretary R Gopalan had said, "There is a regulation for financial institutions in the offing. We are consulting with the stake holders. . . it has to be taken forward which means we have to take it to Cabinet . . . then it has to be taken to Parliament and there are timelines for all this..." he said.

Finance Minister Pranab Mukherjee also said on Thursday that the Centre is closely monitoring MFIs. MFIs provide loans to the poor segment of the society who generally do not get loans from other institutional framework.

Commenting on the performance of banks' penetration in hinterlands, Subbarao said, "There is a view that MFIs charge high rate of interest. . .but If the banks cover the last mile, many of the MFIs can get institutional credit at cheaper rate."

He added, "We are marshalling all the arguments and I am not suggesting we will initiate legal actions but we will consult with the government."

Capping of interest rates by MFIs has evoked a sharp division among stakeholders.

A bill on MFIs, however, is not likely to cap interest rates.

Asked about further monetary steps that RBI would take to tame inflation, he said, "We will study the desegregate (inflation) data in the money policy review next month. "Inflation figure would be one of the variables to be looked during the review," Subbarao said, adding, "I cannot really speculate the stance monetary policy."

Inflation rose to 8.62 per cent in September due to costlier food items from 8.51 per cent in the previous month.

Also, food inflation further went up to 16.37 per cent during the week ended October 2. RBI is slated to come out with its second quarterly monetary review on November 2 and experts said that it is likely to raise short term key rates by 25 basis points to tame inflation.

On the rising rupee due to surging capital inflows, the RBI Governor said the central bank will intervene if the FII money is volatile and disrupt economic conditions.

"I cannot comment on that...I can only say that we are watching the situation and our policy is clear. We will intervene if (FII) inflows are lumpy and volatile or they disrupt macro economic conditions," he said.

"I cannot really comment on whether we intervene or not," Subbarao said.

Rupee value has risen by 5.53 per cent so far this year to reach little above Rs 44 against a dollar after FIIs pumped a record 22 billion dollars in equity markets.

Asked about the impact of the forthcoming Rs 15,000 crore (Rs 150 billion) initial public offer of the state-owned Coal India Ltd, RBI Deputy Governor Subir Gokarn said, "We are sensitive to the situation ..it may put some pressure (on liquidity) at least temporarily."

To a query on the rising number of fake currency cases in Punjab, the RBI governor admitted that there was a problem of fake currency across the country.

"We did discussed the issue with our officials here yesterday that if there are instances of fake currency due to border with Pakistan.

They told us that there is a problem of fake currency across the country and there is in Punjab too but it is not special for any heightened problem because of the border situation," Subbarao said.

Asked to comment on fiscal sops being doled out by states, he said the Centre and states are back on the path of fiscal consolidation, having drifted away from it for a while due to the impact of global financial crisis.

"Both Centre and State governments had embarked upon fiscal responsibility legislations. They were progressing along...they have gone off the track a little bit because of the crisis (global slowdown)," Subbarao said.

"And we see that states and centre are trying to come back on fiscal consolidation track. We believe that our monetary policy will become more effective if there is fiscal consolidation," he added.

Meanwhile, RBI deputy governor Usha Thorat refuted reports of coin shortage in the north India and promised to respond if there are such shortages.

"Whenever there are reports of coin shortage, we respond to that." About shortage of coins in Amritsar and some other parts of Punjab, she promised to meet the requirements.