MFIs not to cap rates

MUMBAI: The microfinance industry has decided not to work towards a ceiling on interest rates. The stand was taken by the Microfinance Institution Network (MFIN) — a newly-formed self-regulatory body of MFIs in its recent meeting.
Members of the association have also agreed that MFIs would cap their cumulative exposure to a household at any point of time to Rs 50,000.

World-wide, there has been a debate on capping lending rates of MFIs, with regulators in many countries fixing a maximum lending rate. The argument has been that since MFIs lend to the underprivileged, there should be some protection to the borrower from usurious rates.

At a media meet in Mumbai, Vijay Mahajan, chairman of the association and promoter of Basix — one of the earliest microfinance groups, said the body wants the price discovery to take place through play of market forces rather than by restrictive measures. He added that competition would ensure fair pricing of lending rates. MFI disbursals have grown at a compounded rate 90% over the past few years.

Presently, the MFI market, estimated at around Rs 35,000 crore, is evolving at various levels across the country, with a few MFIs operating in the south achieving scalability. While the industry has a reasonable presence in the east and central, they still have to make their presence felt in the northern and western parts of the region. As a result, both the cost of obtaining funds and operating costs have varied, depending on their scale. In such a situation, it is felt that it may not be prudent to impose a cap on interest rates.

In a move to encourage members comprising around 35 NBFC MFIs, it has set a code of conduct focusing on responsible lending, including ethical recovery practices and transparency, among other things.

According to Suresh Gurumani, CEO of SKS Microfinance, the move to restrict exposure would limit indebtedness among borrowers. It is estimated that an average size of a loan extended by an MFI is Rs 6,519 per household, while the average loan requirement for a poor household is Rs 20,000 per year, according to a presentation made by MFIN.

It has also decided that consciously no MFI will be a fourth lender. To update themselves on the borrowers’ credit history, MFIN members have become members of two credit bureaux — Cibil and Highmark. They have, in fact, picked up a stake in the latter. The members, however, clarified that the extent of multiple lending is less than 15%. Even asset quality of lending is good with recovery rate of over 78%.

MFI lenders have been criticised for their multiple lending and unfair recovery practices from the rural poor. It is felt that by imposing such caps, they also ensure that the indebtedness levels remain under control.