MICROCAPITAL BRIEF: Indian Banks Amend Loan Requirements in Bid to Lower Microfinance Institution Lending Rate to 24%

Several large Indian banks have joined forces to modify requirements on loans made to microfinance institutions (MFIs) in an effort to bring change to the lending practices of MFIs.

Some of the changes put into place include lower rates for end-borrowers of MFIs and mandatory audits of MFIs’ accounts by chartered accountants. In particular, the State Bank of India (SBI), a state-owned bank which provides wholesale funding to MFIs, plans to require its MFI clients to disclose their lending rates and to obtain ratings from rating agencies. M I Dholakia, deputy general manager at SBI warns that his institution plans “to pursue our MFI clients to adopt fair loan practices, good recovery practices and finally, charge reasonable interest rates… If they continue to charge high rates, their rating may go [into] reverse, which will make their chances of getting fresh loans from SBI remote”.

“We are asking MFIs not to charge over 24%. Whenever we find that they are charging higher, we have decided not to renew their account” says Archana Bhargava, general manager of the Punjab National Bank, a nationalized, government owned bank. He laments that a lack of proper auditing is making it hard to monitor MFIs.

The Indian MFIs reporting data for 2009 to the Microfinance Information Exchange (MIX), the microfinance information clearinghouse, have an aggregate loan portfolio of USD 4.6 billion, total assets of USD 5.1 billion and 26.4 million active borrowers.

About Punjab National Bank (PNB):

Punjab National Bank is a nationalized, government-controlled bank in India with a mission to serve the unbanked. Established in 1895, it currently has 4,525 branches throughout the country. PNB reported total assets of INR 3.1 trillion (USD 66.3 billion) as of June 30, 2010.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:

[1] The Financial Express: Banks force MFI clients to reduce interest rates:

http://www.financialexpress.com/news/Banks-forc-e-MFI-clients-to-reduce-interest-rates/698497/

[2] Microfinance Information Exchange: India:

http://www.mixmarket.org/mfi/country/India

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

https://www.microcapital.org/microcapital-brief-india%E2%80%99s-finance-ministry-asks-banks-to-ensure-that-microfinance-institutions-mfis-to-which-they-lend-cap-lending-rates-at-24/

[4] MicroCapital Universe: Punjab National Bank

https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Punjab+National+Bank#Description_140_word_limit_

Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/tiki-index.php

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