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K.R. Srivats

`Merit in allowing these institutions to take deposits'

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New Delhi Jan. 26 The Government appointed Committee on Financial Inclusion may recommend the creation of a new category of non-banking finance company (NBFC) for providing micro-finance services to the rural, semi-urban and urban poor.

It is of the view that there is a strong case for allowing such microfinance-NBFCs to take deposits, given that the proposed microfinance legislation would allow thrift taking from the poor by non-governmental organisations (NGOs).

MF-NBFCs are expected to be larger, with a stronger capital base and more highly regulated than NGOs.

Sources said the financial inclusion committee might recommend that MF-NBFCs be allowed to provide savings services with the safeguard that deposit taking by micro-finance institutions (MFIs) is confined only to its borrowers.

The committee is also likely to suggest that the Reserve Bank of India should offer provisional registration to these MF-NBFCs for three years with an entry level capital of Rs 25 lakh and then raise it to Rs 2 crore.

RBI's NBFC guidelines currently stipulate an entry-level capital of Rs 2 crore.

This entry-level requirement is considered to be rather high for starting an MFI.

The Government had in June 2006 constituted a committee on financial inclusion, under the chairmanship of Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister.

This committee was asked to, among other things, suggest measures including institutional changes to be undertaken by the financial sector to implement the proposed strategy of financial inclusion.

The committee has firmed up its draft interim recommendations, sources said.

Indications are that the committee would recommend that at least 80 per cent of the assets of the MF-NBFC should be in the form of micro-credit loans of up to Rs 50,000.

The committee is likely to suggest that MF-NBFCs should be defined as a company that provides thrift, credit, micro-insurance, remittances and other financial services up to a specified amount to the poor in rural, urban and semi-urban areas.

Besides recommending that the MF-NBFCs be permitted to take external commercial borrowings (ECBs), the committee may also suggest that these companies be exempted from State Money Lenders' Acts

The Securities and Exchange Board of India is likely to be requested to permit venture capital funds and mutual funds to invest in the equity of such MF-NBFCs.

The Rangarajan committee may also suggest that these MF-NBFCs be eligible to be business correspondents.

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