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MFI interest rate on loans likely to be capped at around 24 pc…….MADHUSUDAN SAHOO & George Mathew
Interest rates on loans from microfinance institutions (MFIs) are likely to be capped at around 24 per cent. Currently, MFIs are charging 26-40 per cent on small loans extended to their rural customers — many of whom are yet to get even a bank account — while urban customers get personal loans at 12 per cent from commercial banks.
Though neither the RBI nor the government has fixed any ceiling on MFI interest rates, the consensus among bankers and the regulator is that rates should not be more than 24 per cent. “We are awaiting a directive on the 24 per cent ceiling from the RBI and the government. Even if a cap is not imposed officially, this might be imposed on an informal basis and banks won’t fund MFIs that charge more than 24 per cent,” a senior official of a nationalised bank said. The finance ministry has already asked PSU banks to not extend funds to MFIs which are charging high interest rate.
Nabard chairman U C Sarangi said MFIs are in a position to reduce interest rates as their margins have gone up and operational expenses have come down. As per the Microfinance Bill, which is now pending in Parliament, Nabard will become the regulator for MFIs that are registered as societies and trusts.
However, the problem is that microfinance companies come under different regulations. MFIs registered as NBFCs (like SKS Microfinance) are regulated by the RBI. There are also non-profit NBFCs registered under Section 25 of the Companies Act.
Banks that are funding MFIs are also not comfortable with the high rates being charged by MFIs, as banks generally charge around 9-11 per cent from such companies. “Banks have slowed down the funding of microfinance companies due to the recent problems relating to high interest rates and use of strong-arm tactics by MFIs for loan recovery. We have already cut funding to MFIs that charge high rates,” a PSU bank official said.
This means MFIs that rely on banks for their fund requirements will have to cut rates. SKS Microfinance, the leader in the segment, charges 26 per cent rate on its loans. Some MFIs in eastern and southern parts of the country have even been charging 40-45 per cent.
Another grouse of the banking industry is that the recovery rate is fairly good in the MFI segment. The RBI’s survey of MFIs has revealed a recovery rate of over 90 per cent in the MFI segment. “Then why should the MFIs charge higher interest rates?” PSU bankers ask.
According to bankers, MFIs have been exploiting the inability of normal banks to reach out to poor households in the rural areas that are not in a position to offer any collateral. It is no wonder then that total outstanding loans portfolio rose from Rs 3,456 crore in 2007 to Rs 11,734 crore in 2009, indicating a compounded annual growth rate (CAGR) of 84.3 per cent. For-profit MFIs have now gained in market share, both in terms of clients and total outstanding loan portfolio.
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