MICROCAPITAL BRIEF: Reserve Bank of India (RBI) May Consider Raising Margin Cap on Microloans if MFIs Relinquish Priority-Sector Status

The Reserve Bank of India (RBI), the country’s central bank, reportedly has refused to remove the 26-percent interest rate cap on loans disbursed by microfinance institutions (MFIs) or to alter margin caps for individual loans to borrowers, despite opposition from within the sector. In August 2012, RBI lowered the cap on margins from 12 percent to 10 percent for MFIs with loan portfolios greater than INR 1 billion (USD 18.3 million). The margin cap for MFIs with smaller loan portfolios remained unchanged at 12 percent. The Microfinance Institutions Network (MFIN), an organization of 47 Indian MFIs, requested that RBI restore the margin cap for larger MFIs to 12 percent, reportedly claiming the change hinders the sector’s health. K. C. Chakrabarty, the deputy governor of RBI, reportedly responded, “If I remove this [margin] cap it will not be treated as priority-sector lending. That much only I know. If they [MFIs] are happy with it, we may examine that.” Priority-sector lending refers to the RBI mandate that banks allocate 40 percent of net bank credit to reduced-interest rate loans to predetermined “priority” sectors, which includes the microfinance industry, agriculture, and small scale industries.

RBI also decided to maintain the 26-percent lending cap that has been in place since May 2011. Mr Chakrabarty reportedly said, “Charging more than 26 percent is exploitation. If you are not exploiting a person, then it is a reasonable rate. So, the RBI has fixed the rate at 26 percent.”

By Nicole Boyd, 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. RBI’s reserves stood at USD 302 billion at the end of 2011.

About Microfinance Institutions Network (MFIN)
The Microfinance Institutions Network (MFIN) is a trade association of 47 Indian microlenders that operate as non-banking finance companies and together reportedly account for approximately 80 percent of the Indian market. MFIN is supported by the Omidyar Network, a US-based philanthropic investment firm, and the International Finance Corporation (IFC), a member of the World Bank Group.

Sources and Additional Resources:

NY Daily News. “’Loans to MFIs not to be priority-sector if margin cap goes’,” http://india.nydailynews.com/business/aedfb5b60e52024d54377f8d2c225596/loans-to-mfis-not-to-be-priority-sector-if-margin-cap-goes

The Indian Express. “Fix loan margin cap at 12%: Microfinance Institutions Network,” http://www.indianexpress.com/news/fix-loan-margin-cap-at-12–microfinance-institutions-network/991143/1

MicroCapital. 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. April 26, 2012, “MICROCAPITAL BRIEF: Microfinance Institutions Network (MFIN) Asks Reserve Bank of India (RBI) to Assist in Recovering Loans Outstanding in Andhra Pradesh,” https://www.microcapital.org/microcapital-brief-microfinance-institutions-network-mfin-asks-reserve-bank-of-india-rbi-to-assist-in-recovering-loans-outstanding-in-andhra-pradesh/

MicroCapital Universe Profile: Microfinance Institutions Network (MFIN) https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Microfinance+Institutions+Network+%28MFIN%29

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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