The inclusion of bank finance to Microfinance Institutions (MFIs) in Priority Sector Lending (PSL) in India has been a significant development for the microfinance sector. Here are some details about the inclusion of bank finance to MFIs in PSL:
- Priority Sector Lending (PSL): The RBI has mandated that banks must lend a certain percentage of their total advances to the priority sector, which includes microfinance. The PSL target for banks is currently set at 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure (CEOBE), whichever is higher.
- Inclusion of bank finance to MFIs: In 2015, the RBI included bank finance to MFIs in PSL, subject to certain conditions. The key conditions are:
- The MFIs must be registered as NBFC-MFIs and comply with the regulatory framework established by the RBI.
- The MFIs must follow the Fair Practices Code for NBFC-MFIs issued by the RBI.
- The loans extended by banks to MFIs should be used only for on-lending to individuals and small businesses in the microfinance sector.
- The loans extended by banks to MFIs should be routed through a separate sub-limit within the overall PSL target.
- Benefits of inclusion: The inclusion of bank finance to MFIs in PSL has several benefits, such as:
- Increased flow of credit to the microfinance sector: The inclusion of bank finance to MFIs in PSL has led to a greater flow of credit to the microfinance sector, which in turn has helped to improve financial inclusion.
- Improved access to funding: MFIs have greater access to funding from banks, which has helped to reduce their dependence on other sources of funding, such as equity and debt capital markets.
- Lower cost of funding: Banks typically lend to MFIs at a lower cost than other sources of funding, which has helped to reduce the cost of credit for microfinance borrowers.
- Challenges and concerns: The inclusion of bank finance to MFIs in PSL has also raised some challenges and concerns, such as:
- The risk of over-indebtedness: There is a risk that the increased flow of credit to the microfinance sector could lead to over-indebtedness of borrowers, especially if lending practices are not regulated properly.
- The risk of concentration of credit: The inclusion of bank finance to MFIs in PSL could lead to a concentration of credit in certain regions or with certain types of borrowers, which could lead to systemic risks.
- The need for proper regulation and supervision: The inclusion of bank finance to MFIs in PSL highlights the need for proper regulation and supervision of MFIs to ensure that they operate in a transparent and accountable manner.
In conclusion, the inclusion of bank finance to MFIs in PSL has been a significant development for the microfinance sector in India. However, it is important to ensure that lending practices are regulated properly to avoid over-indebtedness of borrowers and systemic risks.