Reserve Bank on Wednesday relaxed the debt restructuring norms for the microfinance sector to enable banks to provide liquidity support to the crisis-ridden Micro Finance Institutions (MFIs).

Attributing the current problems of the MFI sector to external factors the RBI said, the temporary measures being announced by the central bank would help in providing liquidity support to the MFIs.

The bank said it would facilitate operations till Malegam Committee submitted its report and measures are taken to bring about long term and structural changes in the functioning of MFIs.

Under the new norms, which will remain effective till 31st March, 2011, banks would be allowed to treat the advances to MFIs as good assets even if such loans are not fully secured.

The decision would allow banks to restructure loans provided to the MFIs without much difficulty.

The decision follow a meeting called by the Reserve Bank last month to assess the problem of the microfinance sector in Andhra Pradesh and other states and also to work out interim measures to deal with the situation.

In order to prevent the problem from fanning out to states other than Andhra, the Indian Banks’ Association (IBA) urged the RBI to relax the debt restructuring guidelines for the MFI sector.

The problems in the microfinance sector erupted after the Andhra Government imposed restrictions on activities of the MFIs following spate of suicide by harried borrowers.

Making a case for some interim measures to deal with the situation, the bankers had told the RBI that “collections by MFIs in Andhra Pradesh had deteriorated seriously and there were incipient signs of contagion spreading to other states.”

Last year in October, RBI constituted a high level committee under Y H Malegam to study and suggest measures to mitigate the concerns on the functioning of microfinance institutions.

Kumar Mangalam Birla, Shashi Rajagopalan and U R Rao (all are on the Central board of RBI) and deputy governor K C Chakrabarty are the members of the panel.

The Committee was given the mandate to study the issues and concerns in micro finance sector, including ways and means of making interest rates charged by them reasonable.

The panel is expected to submit its report by the end of this month.

The Reserve Bank regulates only those MFIs which are registered with it as non-banking finance companies (NBFCs). However, it does not prescribe lending rates for these institutions.

Although the registered companies cover over 80 per cent of the microfinance business, in terms of number of companies they constitute a small percentage of the total number of MFIs in the country.