MICROCAPITAL BRIEF: Reserve Bank of India (RBI) Unfixes Microloan Interest Rate Cap to Vary Based on Cost of Funding

The Reserve Bank of India (RBI), the country’s central banking authority, has announced that as of April 1, 2014, it will remove the 26-percent interest rate cap established in 2011 on all microloans extended by microfinance institutions (MFIs) in the country. Instead, MFIs will have the flexibility to charge interest rates as high as the sum of their cost of funds and the lower of: (1) 2.75 times the average “base rate” of the five Indian commercial banks with the largest asset levels or (2) a 10-percent margin for MFIs with loan portfolios exceeding 1 billion INR (USD 16.1 million) or a 12-percent margin for all other registered MFIs. LiveMint, an Indian publisher of business news, reported the average base rate to be 10 percent as of February 7, 2014. According to a statement attributed to Mr Chandra Shekhar Ghosh, chairman and managing director of Indian MFI Bandhan Financial Services, “[The removal of the interest rate cap] is good news for the MFI sector. The RBI’s decision will particularly help those with higher cost of borrowing.”

By A’kos Szebeni, 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 0.5-percent stake in NABARD as of March 31, 2013.

Sources and Additional Resources:

[1] The Economic Times, “RBI removes 26% interest rate cap on MFI loans,”

[2] LiveMint, “RBI eases lending norms for microfinance institutions,”

MicroCapital, March 11, 2013, “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, February 25, 2013, “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, January 25, 2013, “Microcredit Regulatory Authority (MRA) of Bangladesh Plans to Lower 27% Microcredit Interest Rate Cap,”

MicroCapital, December 19, 2012, “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, November 18, 2010, “Bangladesh Microcredit Regulatory Authority (MRA) to Restrict Fees, Cap Microloan Interest Rates at 27%, Discourage Flat Interest Rates,” https://www.microcapital.org/microcapital-brief-bangladesh-microcredit-regulatory-authority-mra-to-restrict-fees-cap-microloan-interest-rates-at-27-discourage-flat-interest-rates/

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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