Maarg Manthan · Topic 17.12

Y.H. Malegam Committee on Microfinance Institutions and NBFC Regulation

Current Affairs & Government Schemes › Key Government Committees and Commissions · Topic 17.12

The Y.H. Malegam Committee on Microfinance Institutions was a sub-committee of the Central Board of the Reserve Bank of India, set up in 2010 under chartered accountant Y.H. Malegam after the microfinance crisis in Andhra Pradesh, and it reported in January 2011. It recommended a separate class of non-banking financial company called NBFC-MFI, with at least 85 per cent of assets as qualifying loans to low-income borrowers, a cap on loan size, a margin cap of 12 per cent and an interest rate cap of 26 per cent. In March 2022 the RBI replaced these caps with a household-income based framework.

5 min read · UPSC Prelims · Current Affairs & Government Schemes · Key Government Committees and Commissions

At a Glance

Body Sub-committee of RBI Central Board
Chair Y.H. Malegam
Report January 2011
Trigger Andhra Pradesh microfinance crisis, 2010
2022 change Household income test, no rate cap
Exam link UPSC Prelims, Current Affairs and Government Schemes: Key Government Committees and Commissions

Where Does It Fit?

This topic is the third of the older committee series. It links financial inclusion to prudential regulation and sets up the monetary policy framework committee that follows. Previous topic: L.C. Gupta Committee on Financial Derivatives. Next topic: Urjit R. Patel Committee on Monetary Policy Framework.

Area	Recommendation
New category	Create a separate category of non-banking financial company, called NBFC-MFI, for companies that lend mainly to small borrowers
Qualifying assets	At least 85 per cent of the net assets of an NBFC-MFI should be qualifying assets, which are loans to low-income households for income generation
Borrower income	Annual household income should not exceed Rs 60,000 in rural areas and Rs 1,20,000 in urban areas
Loan size	A first-cycle loan should not exceed Rs 35,000, and later cycles Rs 50,000, with total indebtedness of a borrower not more than Rs 50,000
Price caps	A margin cap of 12 per cent, and an interest rate cap of 26 per cent on individual loans, with a limit on processing fees
Borrower protection	No lending by more than two microfinance lenders to a borrower, no collateral, and grievance and coercion safeguards

What Led to the Committee and What Followed?

Andhra Pradesh crisis: In 2010 reports of over-indebtedness and aggressive recovery in Andhra Pradesh were linked to suicides, and the state passed an ordinance and then an Act in December 2010 that restricted recovery
Impact: Repayment collapsed in Andhra Pradesh and banks cut credit to microfinance institutions, so the sector went through a sharp contraction
RBI action: The RBI accepted most of the Malegam recommendations and issued guidelines in December 2011 for NBFC-MFIs
Bill: The Microfinance Institutions (Development and Regulation) Bill, 2012 was introduced but lapsed
Credit bureaus: Credit information companies were asked to cover microfinance borrowers to prevent multiple borrowing
Small finance banks: Several large microfinance institutions later became small finance banks, such as Ujjivan and Equitas, after 2015 licences
2022 framework: The RBI in March 2022 set a uniform framework for all regulated lenders, with a household income limit of Rs 3 lakh, a cap of 50 per cent on loan repayment obligations, and board-approved pricing without a hard cap
Qualifying assets now: The share of qualifying assets for NBFC-MFIs was reduced to 75 per cent in the 2022 framework

What Else Should You Remember?

Full form: NBFC-MFI means a non-deposit taking non-banking financial company that is a microfinance institution, with a minimum net owned fund of Rs 5 crore, or Rs 2 crore in the north-eastern states
Microfinance meaning: Provision of small loans, savings and insurance to the poor who lack access to banks, mainly through self-help groups and joint liability groups
Models: The Self-Help Group Bank Linkage Programme of NABARD began in 1992 and is the main model, and microfinance institutions form the second channel
Scale-based regulation: The RBI introduced scale-based regulation of NBFCs in October 2021, with Base, Middle, Upper and Top layers, which affects how large NBFCs are supervised
Regulation of NBFCs: NBFCs are regulated by the RBI under Chapter IIIB of the RBI Act, 1934, and they cannot accept demand deposits
Link to inclusion: Microfinance supports the goals tracked in the Financial Inclusion Index, as in Financial Inclusion Index (Reserve Bank of India)
Risks: Over-indebtedness, high interest costs, coercive recovery and stress after shocks such as demonetisation and the pandemic
Link to rural schemes: Microfinance works with livelihood missions, as in Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM)
Gender angle: Most microfinance borrowers are women, which links the sector to women empowerment goals
Verification note: Reports differ on exact sector size and stress levels, so readers should check the latest RBI and industry body data

Why Does It Matter for the Exam?

Body: RBI sub-committee under Y.H. Malegam, 2010 to 2011
Numbers: 85 per cent qualifying assets, 12 per cent margin, 26 per cent rate, Rs 35,000 first loan
Trigger: Andhra Pradesh microfinance crisis
2022: Household income test and 75 per cent qualifying assets
Common errors: Saying the Committee was set up by SEBI or that the 2022 rules kept the rate caps

As an analytical point, microfinance needs rules that stop over-lending without choking credit for the poor. A focus on repayment capacity, credit bureau data and fair recovery is more durable than hard price caps alone.

Why Is This Topic Important?

Committee Numbers asked
NBFC-MFI Definition
Current framework 2022 changes

What Came Next?

The next topic covers the committee on monetary policy framework. Next topic: Urjit R. Patel Committee on Monetary Policy Framework.

Key People and Terms

NBFC-MFI Microfinance non-banking finance company
Qualifying asset Eligible small loan
Margin cap Limit on spread
Joint liability group Small borrower group
Over-indebtedness Too much debt for income
Net owned fund Owned capital

Exam Corner

Points to Remember

Chair: Y.H. Malegam, report January 2011.
Qualifying assets: 85 per cent (75 per cent since 2022).
Caps: 12 per cent margin, 26 per cent rate.
Trigger: Andhra Pradesh crisis.
2022: household income Rs 3 lakh.

Do Not Confuse With

Malegam and Nachiket Mor committees Microfinance rules versus financial inclusion roadmap
NBFC and bank Cannot take demand deposits versus can
SHG linkage and MFI NABARD group model versus company model

Memory Hook

Malegam capped the price, defined the poor, and made MFIs a class.

Mains Angle

Mains questions ask about balancing credit access and borrower protection. These points give a balanced frame.

Need Credit for the poor
Risk Over-indebtedness
Way Income-based rules

A Question You May Face

An original practice question, not a past paper question.

“Discuss the lessons of the Andhra Pradesh microfinance crisis and the role of the Malegam Committee in shaping regulation of the sector.”

How to Answer

Crisis AP 2010.
Report NBFC-MFI and caps.
Change 2022 framework.
Way Income test.

GS Relevance

Prelims: Malegam Committee, NBFC-MFI definition, caps. GS Paper 3: inclusive growth, microfinance, regulation of NBFCs, financial inclusion.

Frequently Asked Questions

What is the Malegam Committee?

The Malegam Committee was a sub-committee of the RBI Central Board under Y.H. Malegam, formed in 2010 after the Andhra Pradesh microfinance crisis. Its January 2011 report proposed a separate NBFC-MFI category, qualifying asset norms, loan size limits and caps on margin and interest to protect borrowers.

Who was Y.H. Malegam?

Y.H. Malegam was a chartered accountant who served on the Central Board of the Reserve Bank of India and chaired the sub-committee that studied microfinance institutions in 2010 and 2011. His report became the basis of the RBI rules for NBFC-MFIs issued in December 2011.

What is an NBFC-MFI?

An NBFC-MFI is a non-deposit taking non-banking financial company that lends mainly to low-income households. Under the Malegam-based rules at least 85 per cent of its assets had to be qualifying loans. This share was reduced to 75 per cent under the RBI framework of March 2022.

What caps did the Malegam Committee suggest?

The Committee suggested a margin cap of 12 per cent for large microfinance institutions and a cap of 26 per cent on interest rate on individual loans. It also limited the first-cycle loan to Rs 35,000, household income to Rs 60,000 rural and Rs 1.2 lakh urban, and borrowers to two lenders.

What is the latest regulatory framework for microfinance?

In March 2022 the RBI issued a uniform framework for all regulated lenders to microfinance borrowers. It uses a household income test of up to Rs 3 lakh, limits loan repayment obligations to 50 per cent of household income, and lets boards fix pricing without the earlier hard interest cap.

PYQ Practice — Statement Analysis

1 The Malegam Committee was set up after the microfinance crisis in Andhra Pradesh.

True

It reported in January 2011.

2 The Malegam Committee suggested a minimum of 85 per cent qualifying assets for NBFC-MFIs.

True

The share was cut to 75 per cent in 2022.

3 The Malegam Committee was a SEBI committee.

False

It was a sub-committee of the RBI Central Board.

4 The 2022 RBI framework kept a 26 per cent interest cap.