Drastic changes towards the functioning of microfinance institutions happen to be recommended with a panel appointed by Reserve Bank of India.The Malegam board has projected a cap of 24 percent on the interest charged and a higher limit of 25,000 Rupees ($549; £344) on personal loans.
It shows that not more than 2 institutions should be permitted to give loan to the same borrower.It recommended that loan tenure must vary using its quantity.
Protecting the borrower
The operating type of many microfinance institutions (MFIs) has been criticized of late. There have been accusations of charging unreasonable fees and making use of loan sharks to collect outstanding payments.
This has led many to raise concerns that institutions are doing more harm to poor people, instead of offering some help.In the report, the panel made an effort to deal with these concerns.
It proposed a transparency in charges, with an MFI permitted to levy only 3 charges - processing fee, interest and insurance charge.It also said that there must be a minimum period of moratorium between the disbursements of loan along with the commencement of recovery.
In case of late payments, the onus to avoid using coercive recovery methods has additionally been put on the lenders.
New Regulations
The committee has asked the Reserve Bank to organize a draft Customer Protection Code to be accepted by all MFIs.Its suggestions also include the establishing of the appropriate accusation processes and establishment of ombudsmen to settle any disputes.
While recognizing the need to protect borrowers, it is has cautioned that if the recovery of funds is affected, MFIs will likely be reluctant to lend and also the needy will suffer.
