Micro Finance Institutions (MFIs) which have earned the disrepute of being worse than the unscrupulous village moneylenders may finally be reined in. In an oblique move, the RBI has not only capped the interest rate to be charged by these agencies, but MFIs have also been barred from charging any penalty on delay by its borrowers. The rule does not directly apply to the MFIs but is certainly expected to impact their business in a big way.
MFIs have been a cause of concern in Vidarbha too. There were apprehensions that their proliferation may put farmers in the region into a debt trap. RBI has now allowed banks to classify loans given to MFIs as priority sector lending. However, that would be if the loans are given to only those MFIs that meet a whole gamut of conditions including the cap on interest rates and no penalty on delay.
The qualifying MFIs will also have to cut down on consumer loans as RBI conditions want at least 75% of loans be given for income generating purposes only. No borrower can be indebted for an amount more than Rs 50,000 in at least 85% of the loans. The conditions also restrict the choice of borrowers for an MFI. In 85% loans the borrower's household income should not exceed Rs 60,000 a year in rural areas and Rs 1,20,000 in urban areas. Loans have to be without a collateral security and borrower will have the choice over repayment schedule.
If the banks want the loans to be classified under priority sector, they have to ensure that the MFIs comply. Currently the lending rates by MFIs go as high as 36% per annum. MFIs source their funds from bank loans at 13%-14% thus ensuring a huge spread for themselves. The banks will have to ensure that MFIs to whom they lend do not further disburse loans at a margin more than 12% while an overall cap of 26% has to be maintained. Which means the rate charged by a MFI cannot be more than 12% of what it pays to the bank and it has to be under 26% all the time. MFIs can also not take any security deposit or margin money from the borrowers.
Sources said the move will go a long way as banks are always under pressure to meet priority sector lending targets which have to be 40% of its total advances. As a result it would be ensured that the MFIs adhere to the conditions laid down by the RBI as the latter are always in need of bank funds.
"A cap of 26% is reasonable. The RBI plan will work as a big majority of MFIs would starve without bank loans. The latter in turn are under pressure to meet the priority sector lending targets," said Moin Qazi, vice-president of Swarana Pragati, a non-banking finance company having a major stake in micro finance and also a presence in the region.
Loans meeting RBI conditions would be categorized under the priority sector from April 1, 2011, onwards. RBI has also placed certain conditions on the size of the loans by MFIs.
MFIs have been a cause of concern in Vidarbha too. There were apprehensions that their proliferation may put farmers in the region into a debt trap. RBI has now allowed banks to classify loans given to MFIs as priority sector lending. However, that would be if the loans are given to only those MFIs that meet a whole gamut of conditions including the cap on interest rates and no penalty on delay.
The qualifying MFIs will also have to cut down on consumer loans as RBI conditions want at least 75% of loans be given for income generating purposes only. No borrower can be indebted for an amount more than Rs 50,000 in at least 85% of the loans. The conditions also restrict the choice of borrowers for an MFI. In 85% loans the borrower's household income should not exceed Rs 60,000 a year in rural areas and Rs 1,20,000 in urban areas. Loans have to be without a collateral security and borrower will have the choice over repayment schedule.
If the banks want the loans to be classified under priority sector, they have to ensure that the MFIs comply. Currently the lending rates by MFIs go as high as 36% per annum. MFIs source their funds from bank loans at 13%-14% thus ensuring a huge spread for themselves. The banks will have to ensure that MFIs to whom they lend do not further disburse loans at a margin more than 12% while an overall cap of 26% has to be maintained. Which means the rate charged by a MFI cannot be more than 12% of what it pays to the bank and it has to be under 26% all the time. MFIs can also not take any security deposit or margin money from the borrowers.
Sources said the move will go a long way as banks are always under pressure to meet priority sector lending targets which have to be 40% of its total advances. As a result it would be ensured that the MFIs adhere to the conditions laid down by the RBI as the latter are always in need of bank funds.
"A cap of 26% is reasonable. The RBI plan will work as a big majority of MFIs would starve without bank loans. The latter in turn are under pressure to meet the priority sector lending targets," said Moin Qazi, vice-president of Swarana Pragati, a non-banking finance company having a major stake in micro finance and also a presence in the region.
Loans meeting RBI conditions would be categorized under the priority sector from April 1, 2011, onwards. RBI has also placed certain conditions on the size of the loans by MFIs.
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