RBI wants cap on interest rates by MFIs

 In October, the RBI had set up a sub-committee chaired by Y H Malegam to study issues and concerns in the microfinance sector, including the interest rates charged by them.
Sources said the committee has finalised its report after consultation with the stakeholders and is likely to propose a cap on the interest rates that these microlenders can charge from customers.

The report, sources said, will be submitted by the committee to the Reserve Bank on January 20.

The report is widely awaited, since the Finance Ministry is expected to draft a bill to regulate MFIs on the basis of the sub-committee’s recommendations.

Till now, the Finance Ministry has been opposing any cap on the interest rates charged by MFIs, saying such a move will make the business model unviable for these MFIs.

Microfinance the business of doling out small loans to poor people unable to access conventional lending instruments has come under intense scrutiny in AP in the wake of an ordinance passed by the state government.

The Ordinance had tightened the screws on the industry, which has been blamed for a spate of suicides in the state, putting the MFIs coming under fire over their inscrutable business models and high interest rates of as much as 36 per cent.

AP accounts for nearly half of the total MFI business in the country, with major players like SKS Microfinance, Spandana Sphoorty Financial, Basix and Share Microfin present in the state.

Earlier, Prime Minister’s Economic Advisory Council Chairman C Rangarajan had also vouched for capping the MFIs’ interest rate margins.

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

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

The rest of the MFIs are governed by the norms set for cooperative credit societies and other such bodies, depending on the way they are structured.

Experts said MFIs should restrict their lending to productive purposes and not just for consumption-related expenses, as the credit extended by MFIs is sometimes even used to buy consumer durables.

They also said the MFIs should stop extending multiple loans to borrowers as this could lead to defaults and called for the lenders to overhaul their “flawed” business models for sustainability.