Economic survey opposes cap on MFI interest rates

Our Bureau New Delhi | Updated on February 26, 2011

The Economic Survey 2010-11 has indicated that it is opposed to capping interest rates charged by Micro Finance Institutions (MFI).

In January this year, the Malegam Committee constituted by the Reserve Bank of India to study and advice the MFI sector had recommended capping of the interest rates microfinance institutions charge at 24 per cent. There are about 30 million people throughout the country who are beneficiaries of MFI lending.

The Survey says “to place too severe a cap on the maximum interest rate that an MFI can charge can drive some of the poorest and least bankable borrowers towards even greater extortion.”

It points out that while at first sight an MFI charging an interest rate of 24 per cent or 30 per cent per annum may seem “extortionist” since big urban borrowers manage to get money at much lower interest rates, there were two arguments against such a reaction.

“It has to be kept in mind that lending to many small borrowers is much more costly than lending to a few large borrowers. Besides for a lot of these poor borrowers, the alternative to an MFI is not a bank or an organised-sector financial institution but the rural moneylender and such moneylenders often charge interest rates which, on annual basis, go up to 100 per cent or even 200 per cent”.

Published on February 25, 2011

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