RBI deputy governor K.C. Chakrabarty (right) in Calcutta on Saturday. Picture by Kishor Roy Chowdhury
Calcutta, Feb. 16: Microfinance institutions (MFIs) will have to shed their priority sector status if they want the 10 per cent cap on margin rate to be removed.
K.C. Chakrabarty, deputy governor of the Reserve Bank of India, today said the MFIs needed to focus on improving their operational efficiencies rather than asking the regulator for removal of restrictions on interest rates and margins.
“If I remove the cap, it would not be treated as priority sector lending. If they (MFIs) are happy with that, we may examine it,” Chakrabarty said on the sidelines of a seminar here today.
The priority sector tag means MFIs have an assured source of funds from the banks to finance their operations.
“If MFIs are considered outside priority sector lending, the flow of funds will be arrested. The banks will charge a higher interest for unsecured loans,” said Kuldip Maity, managing director and CEO of Village Financial Services, a city-based MFI.
On the basis of the recommendations of the Malegam committee, the RBI had imposed a 10 per cent cap on the margin rate of MFIs. Margin rate is the difference between the rate at which the MFIs borrow and the rate at which they lend.
The margin rate for microlenders with a loan portfolio of Rs 100 crore and above is 10 per cent, while it is 12 per cent for lenders with loan portfolio of below Rs 100 crore.
The regulator had imposed the cap on the margin rate following the crisis in SKS Microfinance in Andhra Pradesh.
The RBI deputy governor also ruled out allowing MFIs to charge an interest rate of more than 26 per cent.
“Charging an interest rate beyond 26 per cent from poor people is exploitation,” Chakrabarty said.
The RBI has set a 26 per cent cap on interest rates to be charged by the MFIs. Several microlenders have asked the apex bank to do away with the caps on rates and margins.
The deputy governor further said MFIs would remain relevant at least for the next 10 years by providing financial services to remote parts compared with banks.
“Let’s accept, banks are still inefficient in this respect,” Chakrabarty said.
He, however, added that microfinance institutions should understand their limitations and limit their scale of operations to select areas, besides assessing the creditworthiness of the borrowers.
“MFIs should develop local expertise and scale up locally. They should not scale up nationally,” he said.