RBI may ease norms for banks lending to MFIs

After a representation by commercial banks, the Reserve Bank of India has urged banks to continue lending to the microfinance sector, after a crackdown on their activities by the Andhra Pradesh government curbed collections and new business.

The RBI on Wednesday also said it is considering a proposal from banks to allow them to restructure loans to the sector, without classifying the assets as non-performing.

This is expected to help avert defaults. A decision will be taken as soon as the Indian Banks' Association comes up with a detailed proposal.

A delegation of banks told the RBI on Wednesday that collections in Andhra Pradesh, the hub of the industry, had suffered significantly since October when the state rules came into effect, and warned that the problem showed signs of spreading to other states, an RBI statement said.

The RBI formed a panel in late October in response to the Andhra Pradesh rules. The panel is expected to submit its recommendations by mid-January.

"The banks stressed the need to work out an interim arrangement involving rescheduling of exposures to MFIs (microfinance institutions) subject to certain covenants such as MFIs agreeing to reduce their leverage and growth projections," according to the RBI statement.