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Banks to fix rate for loans to rural credit units; ceiling on investment in MFs linked to those in venture capital

The Reserve Bank of India has specified several measures for improving the functioning of micro-credit institutions and self-help groups or SHGs in its Credit and Monetary Policy for 1999-2000.

The central bank noted that MCIs and SHGs are important vehicles for delivery of credit to self-employed persons, particularly women in rural and semi-urban areas.

The RBI said it will attach importance to the work of the National Bank for Agricultural and Rural Development and public sector banks in this area. A special cell, manned by a senior officer from the commercial banking sector with practical experience in this area, is being set up in the RBI in order to liaise with NABARD and micro-credit institutions for augmenting the flow of credit to this sector.

The time frame for the cell to complete its work will be one year and its proposals will be given the highest attention.

Several institutions engaged in micro-credit have represented to the RBI that interest rates applicable to bank loans extended to micro-credit organisations should be left free. The rates, they pointed out, must be decided by banks as per normal policy and should not be linked to the interest rate ceiling applicable for direct small loans to individual beneficiaries.

The RBI proposes to accept this suggestion. While direct loans below certain levels by banks will continue to be subject to the interest rate ceiling as prescribed by the RBI from time to time, interest rates applicable to loans given by banks to micro-credit organisations or by these organisations to their members/beneficiaries will be left to their discretion.

It is clarified that interest rates and other terms in respect of government sponsored programmes, such as the Integrated Rural Development Programme, will remain as they are, and there will be no change in applicable interest rate ceilings in respect of loans under government programmes.

Incremental credit given to non-banking finance companies by banks for on-lending to small road and water transport operators and to units in tiny sector of industry, over March 31, 1999, will also qualify for priority sector status.

The RBI has sought to encourage the flow of finance for venture capital. The overall ceiling of investment by banks in ordinary shares, convertible debentures of corporates and units of mutual funds, etc, which is currently at five per cent of their incremental deposits, will stand automatically enhanced to the extent of banks' investments in venture capital. It has also been decided to include investments in venture capital in priority sector lending.

RBI Governor Bimal Jalan's policy statement

April 20, 1999: The RBI's Credit and Monetary Policy

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