MICROCAPITAL BRIEF: India’s Finance Ministry Asks Banks to Ensure That Microfinance Institutions (MFIs) to Which They Lend Cap Lending Rates at 24%

The financial services secretary of India, Mr R Gopalan, has written a letter to public-sector banks asking them to ensure that the microfinance institutions (MFIs) to which they lend on a wholesale basis do not charge more than 24 percent interest to retail borrowers.

The letter requests banks to “monitor the interest rate being charged by the MFIs to the eventual beneficiaries, so as to ensure that the benefits of lending by the bank at reasonable rates eventually flow to the disadvantaged section of the society” [1].

According to the Finance Ministry, interest rates charged to microborrowers continue to be “relatively high”, averaging between 27 percent and 30 percent. “There is a need to impress upon them to reduce the interest rate in proportion to the substantial growth in operations and consequential efficiencies of scale. Many of the PSU (Public Sector Undertaking) banks have been supporting MFIs through term loans at lending rates ranging between 10-12%,” said Mr Gopalan [1].

There is no mention of sanctions, if any, that would be taken against banks that fail to comply.

By Witt Gatchell, Research Associate

About the Finance Ministry of India:
The Finance Ministry of India, as part of India’s central government, measures fiscal trends like output and prices, external sector and financial developments, balance of payments, foreign exchange reserves, exchange rates, external debt, trade, money, banking, financial markets and social sector programs. It releases monthly reports which detail these and other trends in the country.

About Public Sector Undertaking (PSU) Banks:
Public Sector Undertaking is the term used in India to describe a government-owned corporation. PSU Banks are ones in which the government of India has either total ownership or a controlling majority.

Sources and Additional Resources:
[1] The Economic Times, “Banks to ensure MFIs cap interest on lendings at 24%”

MicroCapital Universe. Finance Ministry of India.

Finance Ministry of India. Government of India Website.

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