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In a bid to regulate the margins that microfinance institutions, classified as non-banking finance companies, charge, the Reserve Bank of India has prescribed a new formula. The central bank said the interest rate charged by an NBFC-MFI to its borrower will be the lower of: the cost of funds plus margin; and the average base rate of the five largest commercial banks by assets multiplied by 2.75.
The new loan pricing regime for NBFC-MFIs will be effective from April 1, 2014. Last year, the RBI had imposed a margin cap of 12 per cent for all NBFC-MFIs irrespective of their size till March 31, 2014.
However, with effect from April 1, 2014, the margin caps cannot exceed 10 per cent for large MFIs (loans portfolios exceeding ₹100 crore) and 12 per cent for the others.
The RBI said it will advise the average of the base rates of the five largest commercial banks on the last working day of the previous quarter, which will determine interest rates for the ensuing quarter.
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