Microfinance Focus, Sep 8, 2010: A Reserve Bank of India committee in its draft report has recommended that the priority sector status, which is accorded now to banks’ exposure to Non-Banking Finance Companies, or NBFCs, which also include microfinance institutions, should be withdrawn according to a report published in Economic Times. The committee is headed by executive director VK Sharma. To ensure a non-disruptive, and orderly, phase-out or exit, the group has recommended a sunset period up to March 31, 2012. Recently, RBI had also sent an informal communication to NBFC MFIs, telling them among other things to bring their return on equity below 20%, their return on assets, or RoA, below 2%, to reduce interest rates, to raise transparency levels and to improve governance standards, the report says. Most private and foreign banks use this facility to fulfil their priority sector lending targets. However, sensing an opportunity to boost profits in this form of lending, many foreign banks have been very aggressive in their lending to MFIs. The competition that followed among bankers to lend to select few profitable and professional MFIs has helped some of these institutions to raise funds at competitive rates besides bargaining power, says the report. Few large commercial banks which spoke to Microfinance Focus about this latest recommendation felt that this initiative can be discouraging to the banks. If the priority sector tag were to be withdrawn, banks may not be as enthusiastic in chasing MFIs for business. A top-rated MFI can raise funds from banks at close to 12-13% or a little higher. However, from a bank’s perspective, it can deploy funds on even higher yielding assets such as personal loans where the rate of interest is even higher. The draft report of the RBI committee is yet to be placed in public. The committee, constituted in November 2009 was initially mandated to examine the pros and cons of the recommendation made by the Committee on Financial Sector Reforms about the introduction of priority sector lending certificates (PSLCs) and to make suitable recommendations on its introduction and their trading in the open market. Later, its terms of reference were widened to also review the pros and cons of inclusion of bank lending to micro-finance institutions under priority sector lending