The Telegraph
Thursday , March 13 , 2014
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Change in MFI loan terms

Mumbai, March 12: The Reserve Bank of India today revised norms governing bank funding of micro-finance institutions (MFIs). At present, bank loans to MFIs are classified under priority sector lending.

Under priority sector lending, banks have to lend 40 per cent of their net bank credit to certain segments. Bank lending to MFIs on or after April 1, 2011, for on-lending to individuals is also categorised as priority sector advances.

Banks have to ensure that MFIs comply with the ceiling on two fronts — margin and interest rate, apart from other pricing guidelines, to be eligible to classify their lending as priority sector loans.

While the margin cap stands at 12 per cent for all MFIs, the interest rate cap that an MFI can charge a borrower was fixed at 26 per cent per annum on a reducing balance basis. In a notification issued today, the RBI revised these two requirements in a bid to check the margins of MFIs.

While the margin cap has been revised to 10 per cent for MFIs having a loan portfolio of over Rs 100 crore, it has been retained at 12 per cent for all the other MFIs.

As regards the cap on individual loans, instead of the earlier interest rate cap of 26 per cent, the RBI has now stipulated that this will be the average base rate of five largest commercial banks (in terms of assets) multiplied by 2.75 per annum or cost of funds plus margin cap, whichever is less.