RBI rejects micro finance institutions demand for 26 pc lending cap removal

KOLKATA: Reserve Bank of India has given micro finance institutions or MFIs the cold shoulder to their demand for removing the 26 per cent cap on lending rate.

Deputy governor KC Chakrabarty said MFIs will not get bank loans with priority sector tag if the cap is removed. "Let them consider whether they want that," Chakrabarty said Saturday in Kolkata.

Banks' lending to micro finance companies qualifies as priority sector if the MFI-borrowers follow RBI rules when they on-lend the borrowed fund to the poor. The priority sector tag incentivises banks to lend to MFIs.

Microfinance Institutions Network or MFIN, a self regulatory body for these small lenders, has requested the removal of the 26 per cent interest rate cap after the central bank put a 10 per cent cap on margins for MFIs with loan portfolio over Rs 100 crore.

Chakrabarty said MFIs will remain relevant at least for the next 10 years till banks become efficient in providing financial services to remotest parts of the country.

"Lets accept, banks are still inefficient in this respect," the deputy governor said.