A Reserve Bank of India-constituted group on micro finance has pushed for the creation of an autonomous and professionally-managed National Micro Finance Equity Fund with an initial subscription of Rs 200 crore (Rs 2 billion).

Contributions made by banks to the fund are be treated as weaker section lending under the priority sector. The corpus of the fund is to be raised to Rs 500 crore (Rs 5 billion) over two to three years.

Microfinance has had an asymmetric growth in the country with diverse rates of interest being charged to members.

To tackle this uneven growth, the RBI, in October 2002, constituted four informal groups to study issues relating to  (i) structure and sustainability; (ii) funding; (iii) regulations; and (iv) capacity building for greater public debate.

The group on funding issues has pitched for the creation of a separate category of non-banking finance companies for attending to microfinance business with entry capital requirement of Rs 25 lakh (Rs 2.5 million).

The amount of deposits mobilised by any such MFI should not exceed Rs 5,000 per depositor and all such deposits may be covered by the guarantee of Deposit Insurance Credit Guarantee Corporation.

While all NBFC-MFIs registered with RBI may be allowed to raise deposits, subject to their obtaining minimum credit rating under the special credit rating tools developed for the MFI sector, NBFC-MFIs not registered with RBI and NGO-MFIs may not be permitted to raise deposits.

The group on capacity building said the RBI should facilitate establishing micro-finance funds for capacity building.

Besides the subsidy funds of Swarnajayanti Gram Swarozgar Yojana, funds shall be mobilised from Rural Infrastructure Development Fund, National Bank for Agriculture and Rural Development and also part of the profits of commercial banks.

The group recommended that the RBI should constitute a permanent working group on microfinance constituting members from formal financial institutions, government, apex development banks, non-government organisations and MFIs to monitor and review the progress on allocation of resources and undertaking of capacity building initiatives.

The RBI shall facilitate setting up of business incubation fund through SGSY programme for providing venture capital support as there is a felt need for business support services for healthy growth of the sector.

A separate national fund for business development services could be thought of.

The group said the MFIs may be encouraged and supported to go for campus recruitment from recognized management institutions to initiate professionalism in the sector.

NGOs/ federation of self help groups which have already undertaken onward lending to transform themselves into mutually aided co-operative societies /NBFCs within two years if they intend to continue mobilisation of savings and lending activity, the group on regulatory issues said.

If the NGOs intend to transform themselves into Section 25 companies, they should prepay the deposits collected and continue the lending activity only.

RBI could permit 2-3 years as a transitional period to convert into either MACS or NBFCs.

The size of the loan to individual members of SHGs should not exceed Rs 50,000. The interest charged by NGO to be made public and method of fixation be transparent, it could cover the capacity building and management costs as well.

The NGOs to stop accepting further deposits, till they are transformed Those NGOs, which opt to transform into section 25 companies to repay the deposits and come out of the deposit portfolio.

Others who opt to continue to accept deposits to transform themselves into NBFCs or cooperatives and work within relevant rules.