MICROCAPITAL BRIEF: Commercial Banks, Limited to Charging Half of Microfinance Institution Interest Rates, Ask Reserve Bank of India (RBI) To Lift Cap

Private banks recently asked the Reserve Bank of India (RBI) to lift the interest rate cap on microloans under INR 2 lakh (USD4,265).  Currently, private banks cannot charge more than their benchmark prime lending rates, which range from 11 percent to 16 percent, on these loan amounts. The banks argue that lifting the cap would allow them to go after unbanked segments of the population and provide competition against the high rates charged by microfinance institutions (MFIs) and money lenders.  MFIs and moneylenders typically charge between thirty percent and thirty-five percent on these types of loans.  Also given their distribution network, private banks argue that they can contribute to the growth of the microfinance sector. Mr. M. V. Nair, Chairman of the Indian Banks Association (IBA), declined to comment on banks’ interest rate proposal to RBI, however, he commented that, “Any distortion of the interest rate in the marketplace gives rise to malpractice. As long as banks extend credit at an appropriate price which the market can bear, extending microcredit will help achieve finance inclusion.”

About Reserve Bank of India (RBI):
Established in 1935, Reserve Bank of India (RBI) is the nation’s central bank.  RBI undertakes to consolidate supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, assess the divergence non-performing assets and supervise the rating model for banking sector. RBI consists of twenty-two regional offices. RBI: http://www.rbi.org.in/home.aspx
 
About Indian Banks Association (IBA):
Established in 1946, the Indian Banks Association (IBA) is a trade association for private banks.  IBA works to promote best practices in the banking sector and represents the industry to the Indian regulatory authorities.  Headquartered in Mumbai, IBA currently has about 160 members with 19 local offices and an office in New York City. IBA website: http://www.iba.org.in/homepage.asp
  
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