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Banks told to ensure MFIs cap interest on lendings at 24%………Sangita Mehta
THE government has asked banks to ensure that micro finance institution (MFI) they lend to, do not charge beyond 24% interest from final borrowers, many of whom are poor women and landless labourers. Financial services secretary R Gopalan has spelt this out in a letter to stateowned banks last week.
“You are requested to monitor the interest rate being charged by the MFIs to the eventual beneficiaries, so as to ensure that the benefits of lending by the bank at reasonable rates eventually flow to the disadvantaged section of the society,” said the communique to banks. “It’s imperative that the bank ensure that the rate of interest charged by the MFI to eventual beneficiaries are at reasonable level, say around 22-24% per annum (all inclusive) on reducing balance. This is particularly essential for the large and well established MFIs,” it added.
The finance ministry has also asked banks to ensure that MFIs do not resort to evergreening of loans, that is deals in which they give fresh loans to help borrowers repay the old, sticky loans.
According to a finance ministry official, even though some of the MFIs have cut rates recently, interest charged to the final borrowers continue to be “relatively high”. On an average the rates vary between 27 -30%.
“There is a need to impress upon them to reduce the interest rate in proportion to the substantial growth in operations and consequential efficiencies of scale. Many of the PSU banks have been supporting MFIs through term loans at lending rates ranging between 10-12%,” said Mr Gopalan.
Responding to the development, Suresh Gurumani, CEO of SKS Microfinance, the country’s largest MFI, said, “It is not at all realistic to expect MFIs to cap lending at 22%. But as and when our scales of economy improves the rate charged to the borrowers will come down. If this needs to be done immediately banks should bring down their lending rates to MFIs. Banks lend us at 11%. Add this to our operating cost of 10%. We also set aside 1-1.5% for losses and 3-4% as profit margin.”
Banks on the other hand feel they are charging a reasonable rate of interest to MFI. “It is not true that banks are charging a high interest from MFIs. Given the competition in the banking space it is not possible to do so. A good MFI is charged the same rate as an SME or a good infrastructure company,” said Dena Bank chairman D L Rawal.
In a recent meeting with bank CEOs, Reserve Bank of India deputy governor Usha Throat has also expressed concern over banks lending to forprofit MFIs. Some MFIs charge as high as 40-50% which is close to the interest charged by local money lenders.
In his letter, Mr Gopalan has also pointed that the return on assets (RoA) of well established MFIs is higher than that of comparable institutions in the financial services sector. Well established MFIs like SKS Microfinance have RoA of 3.07% while that of country’s largest bank State Bank of India is 0.9% and second largest Bank ICICI Bank is 1.1%.
SKS Microfinance’s Mr Gurumani, however, said that “an RoA of 3.07% on lending to unsecured business is not very high.”
For new MFIs and particularly those operating in underserved states, the ministry has admitted that the operational cost would be higher in the initial stage. However, it has advised banks that in such cases also a detailed plan should be finalised with the MFI while sanctioning assistance to ensure that the rates are brought down in a phased manner as the organisation grows and benefits of scale of economy accrues.
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