Wednesday, February 16, 2011

No need to cap interest rates charged by MFIs: TIMES OF INDIA

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No need to cap interest rates charged by MFIs: TIMES OF INDIA

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Farm activists say that the move would only add to the farm distress. States were preparing laws to control MFIs with Andhra Pradesh already having put in a place a regulatory body, the circular would shield the MFIs, said Kishore Tiwari of Vidarbha Jan Andolan Samiti.


NAGPUR: Amid hue and cry over micro-finance institutions (MFIs) charging the rural poor exorbitant interest rates, Reserve Bank of India norms continue to allow these entities a free hand in determining their charges. The banks lending to MFIs too continue to have full discretion in fixing their rate of interest.

RBI has issued a latest master circular reiterating its earlier stand on micro-credit on February 14. Master circulars are like ready-reckoners on RBI rules related to a particular aspect. MFI sources said the latest circular removes doubts whether a cap on their rates was in offing, hinting there was a chance of upward revision now. Farm activists of the region, on the other hand, are crying foul, saying finally MFIs were replacing the usurious moneylenders in villages.

The circular said the interest rate applicable to loans given by banks to micro-credit organisations or by micro-credit organizations to self help groups (SHG) or their members would be left to their discretion. At the same time, the circular said competing MFIs were operating in the same area trying to reach out to the same set of poor. This had resulted in multiple lending and overburdening of the rural households.

MFI lending is divided into loans to SHGs mainly run by women and having a common bank account and joint liability group that need not have a common account. D Sathiah, head of strategic services of Basix, an NBFC engaged in micro-lending, said with this circular there were chances of the rates going up by 2% as even the banks might be now charging more.

He said the circular amounted to reiteration of the earlier status while the Malegham Committee on micro-finance had recommended MFIs should charge up to 24% though not directly mentioning a cap should be imposed. However, he also said that there was negligible lending by the banks to MFIs that also meant there might not be much change.

Moin Qazi of Asia Pragati, also a MFI, said that a cap should have been imposed on lending rates. MFIs get funds at around 12% from the banks but lend at around 24%. The rates were as high as 32% before the issue came into limelight. Even as a higher rates were needed to cover defaults, a spread of almost 100% of the cost of the funds was too high, he added.

Farm activists say that the move would only add to the farm distress. States were preparing laws to control MFIs with Andhra Pradesh already having put in a place a regulatory body, the circular would shield the MFIs, said Kishore Tiwari of Vidarbha Jan Andolan Samiti.

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