Malegam Committee - Key Recommendations of the Malegam Committee and more!

The Malegam Committee is a committee appointed by the Reserve Bank of India (RBI) to review the microfinance sector in India. The committee was formed in 2010, and the Malegam Committee chairman was Y H Malegam, a noted chartered accountant and banker. The committee was formed in response to the growing concerns about the practices of microfinance institutions (MFIs) and the impact they were having on the livelihoods of poor borrowers.

This topic of the “Malegam Committee” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Paper 3 (Mains) under the economy subject of the UPSC Exam. In this article, we shall discuss the Malegam Committee UPSC and its relevance for the UPSC exam.

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Latest News related to the Malegam Committee

• The surplus transfer policy follows the recommendations of the Bimal Jalan Committee and Malegam Committee, established by the RBI and the government to review the RBI’s Economic Capital Framework.
• RBI would reserve a significant percentage of surplus for its Asset Development Fund and Contingency Fund. Nonetheless, the Malegam Committee’s (2013) recommendations led to a rise in the surplus’s transfer to the government.
• Eventually, a revised Economic Capital Framework (ECF) was presented by Bimal Jalan. In accordance with Section 47 of the RBI Act, 1934, ECF offers a methodology for assessing the proper level of risk provisions and profit distribution.
• The Jalan Committee’s recommendations were based on factors such as the role of central banks’ financial stability, international practices, legal requirements, and the impact of the RBI’s public policy and operating environment on its finances and associated risks.
• The RBI must maintain a Contingent Risk Buffer (CRB) to ensure economic stability and the Jalan Committee recommended maintaining the CRB between 5.5% to 6.5% of the RBI’s balance sheet.
• The surplus transfer policy is now formula-based, making it transparent, and the formula-based CRB will account for risk provisioning, with decisions on the level of provisioning made by the Central Board of the RBI.

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Malegam Committee

The Malegam Committee is officially known as the "Committee on Microfinance Institutions." It was formed by the Reserve Bank of India (RBI) in 2010 to review the issues and concerns related to microfinance institutions (MFIs) in India. The committee was chaired by Mr. Y. H. Malegam, a well-known chartered accountant.

Key Recommendations of the Malegam Committee

The major recommendations of the Malegam Committee are as follows:

• The committee recommended that the interest rates charged by MFIs should be reasonable and affordable for the borrowers. It suggested that the margin cap (difference between the cost of funds and the lending rate) for MFIs should not exceed 10%.
• The committee proposed the creation of a separate category of Non-Banking Financial Companies (NBFCs) called "NBFC-MFIs." This is to regulate and supervise microfinance activities. It recommended that these NBFC-MFIs should be registered with the RBI and follow a set of prudential norms.
• The committee recommended the introduction of a system to track multiple loans taken by borrowers from different MFIs. It emphasized the need for sharing borrower data among MFIs to avoid over-indebtedness.
• The committee stressed the importance of transparency and disclosure in the microfinance sector. It recommended that MFIs should provide complete and accurate information to borrowers about:
  • the terms and conditions of the loans,
  • interest rates,
  • fees, and
  • repayment schedules.
• The committee recommended the establishment of a robust grievance redressal mechanism to address the complaints of borrowers. It suggested the formation of a separate ombudsman-like authority. It will handle disputes and ensure fair practices in the microfinance sector.
• The committee proposed the formulation of a comprehensive code of conduct for MFIs. This is to ensure ethical practices and responsible lending. It emphasized the need for self-regulation by the industry and adherence to fair practices.

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What is Microfinance?

Microfinance refers to financial services provided to low-income individuals or groups who are typically excluded from access to formal banking services. It includes a range of financial services, including small loans, savings, insurance, and other financial services. Microfinance is often seen as a means to alleviate poverty by providing access to credit and other financial services to those who are otherwise unable to access these services through traditional banking channels.

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History of Microfinancing

• The concept of microfinance has its roots in the 1970s, with the Grameen Bank in Bangladesh being one of the first organizations to pioneer the delivery of small loans to low-income individuals.
• The Grameen Bank model, which was based on the idea of group-based lending, was seen as a means of empowering poor women and promoting entrepreneurship.
• Over the years, the concept of microfinance has evolved and expanded, with microfinance institutions (MFIs) now delivering a range of financial services, including savings, insurance, and other financial services in addition to loans.
• The 1990s saw the growth of microfinance in many countries, including India, where numerous MFIs were established to serve the needs of low-income individuals and communities.
• The rise of microfinance has also been driven by advances in technology, including the development of mobile banking and digital financial services, which have made it easier and more cost-effective to reach remote and underserved populations.
• Despite challenges and criticisms, microfinance continues to play an important role in promoting financial inclusion and poverty reduction globally and is seen as a key tool for achieving the United Nations’ Sustainable Development Goals.

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Conclusion

In conclusion, the Malegam Committee was an important step in addressing the challenges faced by the microfinance sector in India. The Committee’s recommendations provided a roadmap for strengthening the regulatory framework for MFIs, promoting transparency and accountability, and enhancing consumer protection. The Committee’s work helped to promote a more diverse and competitive microfinance sector, with a range of players serving the needs of poor borrowers. The formula-based approach to risk provisioning recommended by the Committee has also helped to promote transparency and accountability in microfinance operations. The Malegam Committee’s work remains relevant today and continues to influence the development of the microfinance sector in India and globally.

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