A large Non Banking Financial Company (NBFC) that predominantly operates as a microfinance institution (MFI) can extend credit at 12 per cent over its cost of borrowing during this fiscal, according to a notification issued by Reserve Bank of India.

In its August 2012 directive to NBFC-MFIs, the RBI had capped the margins (the mark-up charged to borrowers over the institution’s cost of borrowing) at 10 per cent for large MFIs (loans portfolios exceeding Rs 100 crore) and 12 per cent for the others.

Going by the latest notification, customers borrowing from large MFIs over the course of the current financial year will have to pay two per cent extra. An average microfinance loan is about Rs 10,000.

However, with effect from April 1, 2014, RBI said the 12 per cent cap for large MFIs and 10 per cent for others will be restored.

More time sought

Citing difficulties in adhering to the new interest rate cap, the Micro Finance Institutions Network, a self regulatory body of MFIs, had petitioned the RBI to give companies a little more time to adhere to the new guidelines, especially the clause relating to the pricing of credit.

An RBI Committee headed by Y.H. Malegam to study issues and concerns in the MFI sector had recommended a 26 per cent interest cap on all MFI loans. However, the RBI, in its August 2012 notification, said: “Since borrowing costs are dynamic and may exceed the costs envisaged when the Committee recommendations were made, it may be difficult for MFIs which are borrowing at rates higher than envisaged at that time to operate along viable lines if the interest rate is capped at 26 per cent.”

Therefore, while prescribing the interest cap of 12 per cent and 10 per cent, the regulator said that to allow operational flexibility, NBFC-MFIs will ensure that their cost of lending cannot exceed their cost of borrowing plus the margin.

> satyanarayan.iyer@thehindu.co.in

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