MICROCAPITAL BRIEF: Reserve Bank of India Raises Interest Margin Cap to 12% for Larger Microfinance Institutions

For non-banking financial companies (NBFCs) and microfinance institutions (MFIs) of all sizes, the Reserve Bank of India (RBI), the country’s central banking institution, recently set the margin cap, the difference between the amount charged to the borrower and the institution’s cost of funds at 12 percent at least until April 1, 2014 [1]. In 2012, RBI removed the overall interest rate cap of 26 percent and imposed a 10-percent margin cap on MFIs with a loan portfolio larger than the equivalent of USD 18 million and a 12-percent margin cap for smaller MFIs. Some MFIs reportedly are concerned about operational issues that may be caused by changing margins mid-year [2].

By Jennifer Young, Research Associate

About Reserve Bank of India (RBI)
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While non-banking financial companies such as for-profit microfinance institutions operate under RBI regulations, the responsibility for inspecting agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.

Sources and Additional Resources

[1] Reserve Bank of India Notification, “Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) – Directions – Modifications in Pricing of Credit – Margin Cap,” http://rbidocs.rbi.org.in/rdocs/notification/PDFs/CIRMACA31052013.pdf

[2] Business Standard Story, “RBI Allows 12% Margin Cap for Large MFIs,” http://www.business-standard.com/article/finance/rbi-allows-12-margin-cap-for-large-mfis-113053101072_1.html

MicroCapital Story, March 11, 2013, MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Releases Regulations Governing New Bank Licenses,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-releases-regulations-governing-new-bank-licenses/

MicroCapital Story, February 25, 2013, “MICROCAPITAL BRIEF: Reserve Bank of India (RBI) May Consider Raising Margin Cap on Microloans if MFIs Relinquish Priority-Sector Status,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-rbi-may-consider-raising-margin-cap-on-microloans-if-mfis-relinquish-priority-sector-status/

MicroCapital Story, December 19, 2012, “MICROCAPITAL BRIEF: After Reserve Bank of India Caps Microfinance Institution Interest Rates at 26%, Investors Eye Non-Banking Financial Companies,” https://www.microcapital.org/microcapital-brief-after-reserve-bank-of-india-caps-microfinance-institution-interest-rates-at-26-investors-eye-non-banking-financial-companies/

MicroCapital Universe Profile: Reserve Bank of India (RBI)
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29

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