Panel for cap on micro finance firms' margins

Margins must be modest and sufficient enough to just cover transaction costs

He, however, refused to suggest an ideal figure to be followed on the interest.
“I suppose one approach is to fix the margins of MFIs so that the margin they enjoy is not really too high. The margin should be adequate to cover the transaction cost and the risk element.

I cannot say the number. That depends on the rate at which they borrow and the rate at which they lend,” Rangarajan told reporters here on the sidelines of the foundation day fete of a skill-development firm.

To a query on the interest spread suggested by the Andhra Pradesh Government in its report to Malegam Committee, appointed by Reserve Bank of India to study the microfinance sector, he said the report needs to be examined by the committee.

Separate regulator

On separate regulator for micro finance institutionss, Rangarajan said the report of the Malegam committee needs to be taken into consideration before a decision is taken in this regard.

“We need to wait for the report. The Non-Banking Finance Companies (NBFCs) are theoretically under the regulation of RBI. So far, they looked at the liability side of the NBFCs. Now they should look at the assets side also and think what kind of regulation can be thought out,” Rangarajan said.

Rangarajan asseterd that the business model adopted by MFIs, that have been facing rough weather in Andhra Pradesh, should undergo a change.

“One of the problems that have surfaced recently is that they have been indulging in multiple lending and large parts of the loans are given for consumption purposes. This is the model that will lend them in troubles. The whole idea of encouraging microfinance is to encourage credit for income generating activities,” he said.

On the inflation issue, he said by end of December it could come to 6.5 per cent and by March 11 it will further come down to 5.5 per cent.