MFIs must cap their lending rates: Govt

In a bid to stop stop micro-finance institutions (MFIs) from charging usurious rate of interest, the Finance Ministry has asked state-owned banks to ensure that such institutions do not charge a loan rate of above 24 per cent.

Since the micro-financiers take loans from the banks and lend it to customers at a hefty interest rate of as much as 36 per cent, the government is now insisting that public sector lenders must ask MFIs to cap their lending rates in the range of 20-24 per cent as a precondition to access bank finance.

"The Finance Ministry directive says that the lending rate charged by the micro-finance institutions should be about 24 per cent. So it can be 20 per cent, 22 per cent or 24 per cent," S Sridhar, CMD, Central Bank of India said.

Microfinance institutions usually provide financial services in un-banked areas, lending mainly to rural customers.

While the banks charge interest rates in the range of 9-14 per cent on loans given to MFIs, some MFIs in turn charge as much as 36 per cent from their clients.

"What the Finance Ministry is saying is that ensure that whenever you lend (to MFIs), the loan rate (charged by them in turn) are not usurious," Sridhar added.

Under current norms, banks need to give loans to farmers and small-scale industries to the extent of 40 per cent of their loan book, which comes under the category of priority sector lending. When they fall short of the target, the banks can give loans to MFIs and that is also considered part of priority sector loans.

Currently there are about 800 registered MFIs in India. SKS Microfinance Ltd, the largest micro financier in the country, disbursed loans of over Rs 14,000 crore (Rs 140 billion) till March to nearly seven million borrowers.