CB makes collateral deposits compulsory for LMFC lending
Central Bank (CB) has come up with several new directives to streamline Licensed Microfinance Companies (LMFC) lending to poor and vulnerable groups preventing people from falling further into debt traps that lead to serious social and economic problems among families.
LMFCs have been directed to obtain savings deposits as collateral from borrowers against a lending facility granted to them to minimise risks, CB sources said.
Those savings deposits will be an additional source of financing for LMFCs as they can mobilise internal funds thereby reducing their dependence on external funds.
According to the Central Bank directive issued recently these collateral deposits have been made compulsory for microfinance companies.
LMFC’s should accept deposits only as collateral deposits and it cannot entertain time deposits hereafter, CB sources revealed.
This would also help these companies to augment their lending capacity and become financially viable in the long-run.
Additionally, savings deposits would be used as collateral for their loans and can be used to repay loans in case of default, thereby reducing the institution’s credit risk, a senior Treasury official said pointing out it will encourage low-income groups towards more savings as well.
“All lending intuitions in the informal sector which have not been regulated so far will be brought under the supervision and regulation of the Central Bank,” he said adding that the aim is to prevent lending institutions mushrooming by maintaining a registry of microfinance institutions in the country.
According to the CB directive, LMFCs cannot accept any deposit from minors and these companies shall always be in the position of a net lender.
The total deposits of these companies should not exceed 60 per cent of its total performing loans and advances.
If a customer of a LMFC has fully repaid a loan, such company shall not hold the collaterals for a period of more than six months from the date the loan repayment was completed, according to the CB circular.
These regulated microfinance providers have also been barred from introducing any incentive scheme for soliciting deposits.
Microfinance companies were charging as much as 70-80 per cent interest on loans, until the Government intervened and came to an agreement with the industry association to introduce an interest rate cap of 35 per cent.
However there was no system of evaluating the repayment capacity and the true purpose for which the loan is taken by the borrower.
Under this set up, it is unavoidable that the rural poor gets caught in a debt trap and fall into misery when loans are obtained at very high interest rates and the borrowed money is used for consumption increasing their debts.