The Reserve Bank of India (RBI) has ruled out removal of margin cap on micro-finance institutions (MFIs) for now.

Last week, the apex bank had relaxed norms for non-banking financial companies and MFIs by allowing them to charge interest rates over 26 per cent on loans.

Prior to this, interest rates were capped at 26 per cent as per the Malegam Committee recommendations.

The RBI had also specified that the cap on margins may not exceed 10 per cent for large MFIs (loans portfolio exceeding Rs 100 crore) and 12 per cent for others.

The MFIs were also given five years to make full provisioning against bad loans.

“The cap on margins is a must. We had to introduce the cap because the industry had not behaved responsibly,” K. C. Chakrabarty, RBI Deputy Governor, said at a financial inclusion conference organised by Sa-Dhan and FICCI here on Tuesday.

He said MFIs unable to function within this specified margin cap were not functioning efficiently. He was responding to a query on whether RBI could do away with margin cap to enable MFIs build capacity.

Drought stress

Chakrabarty later said the Indian banking system was resilient enough to face the pressure caused by deficient monsoon on farm loans.

“Whenever there is drought, there is pressure (on farm loans). But we have sufficient rehabilitation measures so that banks can weather it out,” he said. Sa-Dhan Executive Director, Mathew Titus, later told Business Line he was hopeful about the Microfinance Bill getting enacted into law by the end of the year.

srivats.kr@thehindu.co.in

(This article was published on August 7, 2012)
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