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Banks may find it tough to ensure microfinance companies don’t charge high rates


Banks will have to put in place a mechanism to verify that microfinance institutes (MFI) they finance do not charge exorbitant rates to the final borrowers. The finance ministry has asked banks to ensure that MFIs, whom banks are financing, do not lend at rates more than 24% — all inclusive rates — to the ultimate borrowers.

Some banks have recently inserted a clause while lending to MFIs that they should not charge usurious rates to the final borrowers. However, so far, banks have refrained from fixing a cap at which MFIs should lend.

“We will have to take an undertaking from MFIs that they will not charge more than 24%. But the better way of doing it would be RBI asking MFIs to disclose it on their balance sheet about the loan given above 24%,” pointed out Corporation Bank CMD RN Pradeep.

“How this can be translated in reality is not known. What happens if MFIs lend more than 24%?” asked a CMD of another bank, who did not wish to be quoted. “Secondly, banks are not the only source of funds for MFIs. So, technically they can still continue to charge higher rates to the final borrowers,” he added. The Microfinance Institutions Network (MFIN) estimates the outstanding loan portfolio of MFIs is at Rs 35,000 crore. It is estimated that nearly half of this resource raised by MFIs is provided by banks.

Most other bankers said they will have to review all loans to MFIs and insert the clause of 24% cap when the loan comes for renewal. Similarly, RIS Sidhu, chief general manager of Punjab National Bank said the move to cap lending to the ultimate borrower at 24% is a very positive development in two ways. “One, it will make banks more conscious and active on the asset side of lending in rural India and secondly, as PSU banks become more active in rural space, competition will drive down rates,” he said.

In a letter to banks last week, the finance ministry wrote to banks that MFIs continue to charge a relative high rate of 27-30%, even as they receive fund in the range of 10-12% from banks. In this context, the ministry said: “It is imperative that banks ensure that the rate of interest charged by MFIs to eventual beneficiaries are at reasonable level, say around 22-24% pa (all inclusive) on the reducing balance. This is particularly essential for large and well-established MFIs.”

Some states in India have in place Usurious Practices Act, wherein the state caps the rate at which a lender can lend to the final borrower. The rate varies from one state to another. In this context, the finance ministry has said: “States such as Andhra Pradesh and Kerala have covered MFIs under the Usurious Practices Act, the implications of which need to be carefully examined.”