Rural loans still cost the earth

KOLKATA: Lending to the poorer section of the society is still an expensive proposition. Forget money lenders who rule the roost in the rural lending scene.

Even money that is being channelised to farmers or to low-income households through the institutional set-up are not being provided at easy rates.

There are many instances where micro-finance institutions (MFIs), which directly work with the poorer section of the population, charge abnormally high rates of interest. According to primary estimates by RBI, the rates rule somewhere between 15-30% per annum.

MFIs often argue that the high transaction cost for offering loans in the hinterland and the financial risk attached to it has forced them to charge high rates. “Lending to the poor is expensive. But being a development banker, I feel there is a need to regulate interest rates,” said YSP Thorat, chairman, National Bank for Agriculture & Rural Development (Nabard).

RBI, in fact, is collating data on interest rates charged by MFIs. “This is still an unregulated sector. So, it is difficult to regulate the interest rate structure. An act targeted to this sector is being framed now. Once it comes into place, some kind of reconciliation of the interest rate structure could have been done,” a senior RBI official told ET.

Some quarters feel RBI should put a ceiling on interest rates that are being charged by registered MFIs. There are about 800 MFIs in the country to offer financial support exclusively to low-income households. However, just about seven or eight of them are registered with RBI as NBFCs.

“We have come across a few cases where high rates of interest are being charged. This is a matter of concern,” said KG Karmakar, managing director of Nabard. In fact, the Nabard board will shortly meet to devise schemes for MFIs willing to take financial assistance from the micro-finance development and equity fund (MFDEF). During ’05-06, the Union government redesigned an existing MFI fund as MFDEF and enhanced the fund size to Rs 200 crore.

The additional amount of Rs 100 crore is being contributed by RBI, Nabard and commercial banks in the proportion of 40:40:20.

The objective is to facilitate growth of the micro finance sector and enhance the flow of credit to the poor, particularly to women and vulnerable sections of the society. Till March ’06, less than Rs 10 crore has been provided to MFIs under this scheme. Targets and fresh modalities will be decided in the forthcoming meeting. asdfghjkl