MICROCAPITAL STORY: Reserve Bank of India Raises Interest Rates, Forcing Microfinance Institutions to do the same

The Reserve Bank of India (RBI), the country’s central bank, has been steadily increasing its interest rates for the past two years. For microfinance institutions (MFIs), a rising interest rate means they must either absorb the costs themselves or apply these higher rates to their clients. Interest rates are a sensitive topic among microfinance borrowers, and many MFIs have tried to avoid or postpone the day when they will have to raise their own rates. However, with RBI’s most recent increase in interest rates, they may no longer have a choice. The microfinance associate, KAS Foundation, of ICICI Bank, India’s second-largest bank, has just announced that it will increase lending rates, and other institutions look to be on the verge of following suit (see story).

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