November 23, 2010 / 11:41 AM / 7 years ago

UPDATE 1-India plans microlenders' regulatory bill

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(Adds details, background)

NEW DELHI, Nov 23 (Reuters) - The Indian government proposes to introduce a bill to regulate microfinance institutions, accused of aggressive loan recovery practices, a junior finance minister said on Tuesday.

The move follows tight scrutiny of the fast-growing, largely unregulated, small loans sector after fears of large-scale defaults due to high interest rates and reports of suicides due to mounting debt.

"The Department of Financial Services proposes to introduce the Micro Finance (Development & Regulation) Bill, 2010, after taking into account the views of RBI (Reserve Bank of India) and the Malegam Committee recommendations," Namo Narain Meena said in a written reply in the upper house of parliament.

The Malegam committee, headed by central bank official Y.H. Malegam, will look into various issues, "including ways and means of making interest rates charged by them (MFIs) reasonable," Meena said.

The committee is expected to submit its recommendations in three months.

Microfinance loans can be as low as 2,000 rupees ($44) at interest rates that can top 30 percent. Borrowers use the cash for various ventures such as buying livestock or opening a tea stall.

India's central bank currently does not regulate interest rates charged by microlenders, but issues a fair practice code on interest rates to non-banking financial companies.

The eastern state of Orissa said last Friday it would look into lending to the poor, joining southern Andhra Pradesh state which last month tightened rules. [ID:nBMA008907].

"A for-profit MFI should be regulated like any other money lender and there should be good money lending legislation in every state," The Economic Times quoted Y.V.Reddy, a former central bank governor as saying on Tuesday. Indian rating agency CRISIL (CRSL.BO) on Monday put 12 microfinance institutions on a negative ratings watch, saying the recent ordinance in southern India was reducing profits and would make it harder for the firms to attract funds. [ID:nSGE6AL0P6]

The sector surged to prominence when George Soros-backed SKS Microfinance SKSM.BO raised $358 million in an initial public offering in August, becoming the first such firm in the country to go public.

Reporting by Manoj Kumar and Anurag Kotoky; editing by Malini Menon

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