A column recently published on the website of the Economic Times newspaper argues that interest rates charged by microfinance institutions (MFIs) in India should not be capped by the government.
Swaminathan Aiyar, identified as an angel investor in MFIs, cites the recent move by the Indian finance ministry to ask banks that lend to MFIs to cap interest rates at 22 to 24 percent as evidence of the growing resentment regarding the level of interest rates being charged by MFIs [2]. Critics contend that since banks give priority sector loans to MFIs they should control interest rates.
The author argues that, since most microenterprises need small loans on a short-term bases, annualized interest rates are irrelevant to borrowers. Furthermore, heavy competition in the microfinance sector is already driving interest rates down, he says.
The article advocates a cap on dividends as a “least bad” solution to high interest rates and high profit margins of MFIs in India as an alternative to capping interest rates.
By Witt Gatchell, Research Associate
Sources and Additional Resources:
[1] The Economic Times, “Don’t cap microfinance lending rates” http://economictimes.indiatimes.com/opinion/columnists/swaminathan-s-a-a…
[2] 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-m…
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