The Hindu Business Line : `Interest rate cap will hurt access to finance'

Attempts to impose interest rate caps have resulted in either distortion of pricing by providers or withdrawal of lenders thereby hurting rather than aiding improving access to finance, says a Working Paper on Inclusive Financial Systems, authored jointly by Mr Nachiket Mor, Deputy Managing Director, and Ms Bindu Ananth, Manager, ICICI Bank.

This observation is drawn from reports that discuss the experiences of Uganda, Bangladesh and Bolivia with respect to competition and interest rates.

High micro-finance lending rates — say 30 per cent — typically raise questions on the fairness of the lending system: that the urban wealthy pay less while poor people pay more on loans. But high lending rates are not entirely disproportionate to the returns generated by this sector, Mr Mor said.

At very marginal or low levels of activity returns can be as high as 100 per cent, he said. Studies have shown Indian vegetable and fruit vendors generating returns of 10 per cent a day, and other similar undertakings generating returns of 40 per cent a day. Annual returns work out to 6,000 per cent to 20,000 per cent from some undertakings, since there are few overhead costs, he said.

Such entrepreneurs are of course, vulnerable to shocks; a vegetable vendor whose home has been destroyed could take years to recover from it. However, the risk could be covered by insurance which could be paid easily from daily or weekly earnings.

Subsidised funding provided to Micro-Finance Institutions and non-governmental organisations (with whom banks such as ICICI tie up to deliver micro-finance) delays the entry of commercial markets and commercial players, he said.

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