Malegam Committee - Economy Notes for UPSC

The Reserve Bank of India formed a sub-committee in order to study the Microfinance sector regulated by the bank. Microfinance is an important topic for the Civil Service Exam and is included under the GS-III section of the UPSC Syllabus. Candidates can also download the notes PDF at the end of this article. 

Latest Context related to Malegan Committee Report – 

The Reserve Bank of India has proposed a new regulatory regime for microfinance which takes things forward from where they have been since the Andhra crisis occurred over a decade ago.

  1. Uniform regulations proposed by the RBI for entities in the microfinance industry will mark the biggest reform since rules that took effect in 2011 laid the foundation for a modern microfinance sector in India.
  2. In a consultative paper released on June 14 2021, the RBI has laid out several proposals that will be applicable to all lenders (if accepted) engaged in microfinance and introduce a level playing field for banks and NBFC-MFIs.
  3. Some of the proposals given in the RBI regulation for Micro Finance industries are –
    • Microlenders can put in place a board-approved policy to arrive at all-inclusive interest rates charged to the borrower.
    • An interest rate model can be adopted by the NBFC – MFIs taking into account factors such as the cost of funds, margin and risk premium so as to determine the rate of interest to be charged for loans and advances.
    • The rate of interest, the rationale for charging different rates of interest from different categories of borrowers and the approach towards degrees of risk need to be disclosed to the borrower in the loan application form and communicated explicitly in the letter sanctioning the loan.
    • MFIs can lend to borrowers based on the household income limit and the rule that more than two MFIs cannot lend to the same borrower is proposed to be scrapped.
    • the payment of interest and repayment of principal on all outstanding loans of the households at any point of time shall be capped at 50% of household income.

For UPSC Aspirants, it is important to know which ministry and committees deal with what issues and concerns as this can be asked in the UPSC Prelims exam. It is also important to know these details because it helps in understanding how the government machinery works in India.

The information on Malegam Committee Report will definitely be helpful to prepare for the upcoming IAS Exam.

Microfinance 

Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. 

  • It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc.
  • For the purposes of the Malegam Committee report, the Sub-Committee has confined itself to only one aspect of Microfinance, namely, the provision of credit to low-income groups.

History of Microfinancing 

  • The term “microfinancing” was first used in the 1970s during the development of the Grameen Bank of Bangladesh, which was founded by the microfinance pioneer, Muhammad Yunus. 
  • In 1976, Yunus institutionalized the approaches of microfinance, along with the foundation of the Grameen Bank in Bangladesh. 
  • Since in developing countries, a large number of people still depend largely on subsistence farming or basic food trade for their livelihood, therefore, smallholder agriculture in these developing countries has been supported by the significant resources.

Click on the link to read more about Microfinance – UPSC Economics

Malegam Committee

The Board of Directors of the Reserve Bank of India, formed a Sub-Committee of the Board to study matters and concerns in the microfinance sector in so far as they are related to the entities regulated by the Bank. The Sub-Committee was under the chairmanship of Y.H. Malegam. 

The terms of mention of the Sub-Committee included framing the description of ‘microfinance’ and ‘Micro Finance Institutions (MFIs)’ for the point of regulation of non-banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and giving proper recommendations. 

Also, the committee had to look at the widespread activities of MFIs in relation to interest rates, lending and recovery measures to identify trends that impose on borrowers’ interests. 

Candidates can go through the following links tp prepare for the upcoming UPSC Civil services exam even better –

Watch and learn: NBFCs & IBC: RSTV – Big Picture

Malegam Committee Recommendations

A separate category of non-banking finance companies was created for those operating in the microfinance sector to be designated as NBFC-MFI.

The committee recommended certain conditions to be satisfied for NBFCs to be classified as NBFC-MFI:

  1. Not less than 90% of its total assets (other than cash, money market instruments and bank balances) are in the nature of “qualifying assets.”
  2. The income it derives from other services is in accordance with the regulation specified on that behalf.
The following criteria are supposed to be satisfied, for the loan to be a “Qualifying Asset”:
Loan amount must not exceed 25000 & the total outstanding indebtedness of the borrower including this loan also does not exceed Rs.25,000. The loan is granted only to a member of a household with an annual income less than Rs.50000.
Loan tenure is not less than 12 months [Loan amount doesn’t exceed 15000] & 24 months [Other cases].  The loan is repayable by weekly, fortnightly or monthly instalments at the choice of

the borrower.

The loan is without collateral.  Aggregate loan amount granted for income generation purposes is not less than 75% of the total loans given by the MFIs.

Malegam Committee UPSC Notes:- Download PDF Here

The above details would help candidates prepare for UPSC 2021.

Frequently Asked Questions about Malegam Committee

What were the recommendations made by the Malegam Commitee?

The Committee had recommended that net owned funds should be in form of Tier I capital,and has set the minimum capital for NBFC-MFIs at Rs 15 Crore. These recommendations essentially restrict MFI promoters to corporates, or individuals backed by investors with significant capital.

What was the reason the Malegam Committee was set up?

The Reserve Bank of India had appointed the Malegam Committee to go into the regulation of microfinance institutions (MFIs).

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