Malegam Committee

The Malegam Committee occupies a significant place in the evolution of microfinance regulation in India. Formally constituted to examine issues relating to microfinance institutions (MFIs), the committee played a decisive role in shaping a balanced regulatory framework aimed at protecting borrowers while ensuring the financial sustainability of the microfinance sector. Its recommendations had far-reaching implications for banking, financial inclusion, and the stability of credit delivery to low-income households in the Indian economy.

Background and Constitution of the Malegam Committee

The Malegam Committee was constituted by the Reserve Bank of India in 2010 in response to mounting concerns over the functioning of microfinance institutions, particularly following the microfinance crisis in Andhra Pradesh. The committee was chaired by Y. H. Malegam, a respected former president of the Institute of Chartered Accountants of India.
The primary objective of the committee was to review the microfinance sector, identify structural and operational weaknesses, and recommend appropriate regulatory measures to ensure borrower protection, transparency, and sectoral stability.

Context: The Microfinance Crisis in India

Prior to the committee’s formation, the Indian microfinance sector experienced rapid growth, driven by high demand for small-ticket loans among low-income households. However, aggressive lending practices, high interest rates, multiple borrowing, and coercive recovery methods led to severe borrower distress.
The crisis exposed the absence of a clear regulatory framework for non-banking financial company–microfinance institutions (NBFC-MFIs). This context made it imperative for the regulator to intervene through a comprehensive review, leading to the establishment of the Malegam Committee.

Key Objectives and Scope of the Committee

The Malegam Committee was tasked with examining:

• The structure and conduct of MFIs
• The causes of borrower over-indebtedness
• Interest rate policies and pricing transparency
• Recovery practices and customer protection mechanisms
• The appropriate role of regulation and supervision

The committee adopted a borrower-centric approach, emphasising responsible finance rather than unchecked credit expansion.

Major Recommendations of the Malegam Committee

One of the most important contributions of the Malegam Committee was the introduction of a clear definition of NBFC-MFIs. It recommended that at least 85 per cent of an NBFC-MFI’s assets should consist of qualifying microfinance loans, ensuring focus on genuine financial inclusion.
Other key recommendations included:

• Caps on interest rates and margins, to prevent excessive pricing
• Limits on borrower indebtedness, including restrictions on multiple lending
• Standardisation of loan size and tenure, aligned with borrower repayment capacity
• Restrictions on recovery practices, banning coercive methods
• Greater transparency and disclosure norms, including clear communication of loan terms

These measures were aimed at balancing social objectives with financial discipline.

Impact on Banking and the Financial System

The implementation of the Malegam Committee’s recommendations significantly altered the regulatory landscape for microfinance. Banks lending to MFIs benefited from greater clarity regarding risk exposure, as regulated MFIs were now subject to defined prudential norms.
For the banking system, the reforms:

• Reduced reputational and credit risks associated with microfinance lending
• Improved confidence in the NBFC-MFI model
• Encouraged responsible partnerships between banks and MFIs

This strengthened the overall integration of microfinance within the formal financial system.

Implications for Financial Inclusion

From a development perspective, the Malegam Committee reinforced the idea that financial inclusion must be sustainable and ethical. By curbing exploitative practices, the committee’s framework protected vulnerable borrowers while preserving access to credit.
The recommendations helped restore trust in microfinance as a development tool and ensured that credit delivery to low-income households contributed to long-term economic empowerment rather than debt traps.

Role in Regulatory Evolution

The Malegam Committee marked a turning point in India’s approach to regulating microfinance. Its recommendations formed the basis for subsequent RBI guidelines governing NBFC-MFIs and influenced later reforms aimed at harmonising microfinance regulation.
The committee also highlighted the importance of data sharing, credit bureaus, and borrower-level monitoring, which later became central to preventing over-indebtedness in the sector.