Y H Malegam Committee

The Y. H. Malegam Committee refers to an expert panel constituted to examine critical issues in India’s financial and microfinance sectors, particularly in relation to regulation, customer protection, and systemic stability. Chaired by Yezdi Hirji Malegam, a distinguished chartered accountant and long-serving member of the Reserve Bank of India’s Central Board, the committee gained prominence for its detailed assessment of the microfinance industry and for recommending reforms aimed at ensuring ethical lending, transparency, and responsible governance. Its recommendations have had a lasting influence on India’s regulatory framework for microfinance institutions (MFIs) and on broader financial inclusion strategies.
At a time when the microfinance sector faced challenges such as excessive lending, coercive recovery practices, and borrower indebtedness, the Malegam Committee played a defining role in reshaping policy discourse. Its work helped establish clearer operational norms and introduced a more accountable and structured regulatory environment.

Background and Context

The establishment of the Y. H. Malegam Committee emerged in response to widespread concerns regarding the functioning of microfinance institutions during the early 2010s. Rapid expansion of the microfinance industry had generated both opportunities and risks. While MFIs expanded credit access for low-income households, several issues came to light:

• multiple lending to the same borrowers
• aggressive loan recovery practices
• rising indebtedness among vulnerable communities
• governance gaps within certain MFIs
• inadequate regulatory oversight

These concerns were aggravated by specific crises in regions such as Andhra Pradesh, where borrower distress brought the need for comprehensive sector reform to national attention. The committee was formed to review these issues and recommend safeguards.

Mandate of the Committee

The Y. H. Malegam Committee was tasked with reviewing:

• the structure and regulation of MFIs
• lending practices and borrower protection standards
• interest rate policies and transparency norms
• systemic risks within the microfinance segment
• measures to promote sustainable and responsible microfinance

The committee’s recommendations sought to balance financial inclusion goals with the need for ethical and sustainable credit practices.

Key Recommendations

The Committee’s report offered several major recommendations that reshaped regulatory oversight:

• Creation of a New Category—NBFC-MFIs: Introduction of a distinct class of Non-Banking Financial Companies exclusively for microfinance, subject to specific norms.
• Borrower Eligibility Norms: Loans to be directed only at low-income households meeting defined income criteria.
• Restrictions on Multiple Lending: Caps on the number of MFIs that could lend to a single borrower to avoid over-indebtedness.
• Loan Size and Income Limits: Standardised ceilings on loan amounts and borrower indebtedness to protect clients.
• Interest Rate Regulations: Introduction of an interest rate cap or margin restrictions for MFIs to prevent exploitative pricing.
• Transparency in Pricing: Requirement for MFIs to clearly disclose effective interest rates and charges.
• Ban on Coercive Recovery Practices: Implementation of strict guidelines to restrain undue harassment or public pressure during recovery.
• Credit Information Sharing: Mandatory use of credit bureaus to track loans and prevent multiple borrowings.
• Corporate Governance Norms: Enhanced oversight of MFI boards, management practices, and internal controls.

These recommendations provided a structured and ethically grounded approach to microfinance operations.

Impact on the Microfinance Sector

The Malegam Committee’s findings had substantial long-term effects on India’s financial inclusion landscape:

• Strengthened Regulation: The Reserve Bank of India introduced comprehensive guidelines for NBFC-MFIs, improving oversight and risk management.
• Reduced Over-Indebtedness: Borrower protection norms and credit bureau integration helped curb unsustainable borrowing.
• Improved Transparency: Standardised disclosures enhanced borrower awareness and trust.
• Sector Stabilisation: Regulatory reforms restored confidence among investors, lenders, and borrowers.
• Shift towards Responsible Finance: MFIs adopted more ethical operational practices and focused on client protection.

As a result, the sector became more resilient and aligned with India’s inclusive growth objectives.

Broader Significance in Financial Governance

Beyond the microfinance sector, the Y. H. Malegam Committee’s emphasis on transparency, ethical conduct, and borrower protection resonates with broader financial governance principles:

• promotion of responsible lending
• development of sustainable financial markets
• emphasis on regulatory clarity and accountability
• integration of client protection into financial inclusion policies

The committee’s analytical rigour serves as a reference point for regulators evaluating emerging financial sectors, including digital lending and fintech-based microcredit.

Relevance in Contemporary Financial Systems

The Committee’s framework remains relevant as new challenges emerge in the financial inclusion ecosystem:

• digital lending growth requires similar borrower protection safeguards
• evolving credit assessment tools must incorporate ethical principles
• financial literacy and transparency continue to be central to inclusive finance
• increased reliance on technology demands robust data-sharing and governance norms

Thus, the broader spirit of the Malegam Committee—balancing innovation with client protection—continues to guide policy discussions.

Legacy and Importance

The Y. H. Malegam Committee holds a distinguished place in India’s financial legislative history. Its contributions include:

• redefining the microfinance regulatory landscape
• ensuring greater protection for low-income borrowers
• fostering ethical practices within lending institutions
• strengthening frameworks for financial inclusion
• shaping long-term sectoral stability