Hyderabad, December 17: In what could be a body-blow to erring Micro Finance Institutions (MFIs), the state government is proposing to cap their “interest rate spread” at 8 per cent. In its 38- page report submitted to the RBI-constituted Y H Malegam Committee, the government on Thursday, recommended that the state be allowed to regulate interest rates and also prevent MFIs from raising funds from stock markets and private equity investors with a profit-motive.
Y H Malegam was appointed as the head of an RBI board panel to look into making MFIs a more effective tool. The Committee is expected to submit its report to the RBI in January. If the recommendations are accepted, AP will be the first state to cap the interest rates charged by MFIs.
“Considering that state governments have been regulating interest rates being charged by money lenders, there is no reason why it should not be regulating MFI lending rates,” the government said.
MFIs borrow funds from both public and private sector banks at a nominal interest of 12 per cent. But the effective interest rate for borrowers goes beyond 24 per cent considering MFI’s operational costs. “We are suggesting that MFIs should not be allowed to impose more than 8 per cent interest on the original funds they borrow.
Currently, MFIs are charging as high as 30-40 per cent,” R Subrahmanyam (IAS), Principal Secretary, Department of Rural Development told Express.
Stating that the primary target of private equity investors is to make high profits, the government said, “These PEs are not social investors and therefore drive MFIs to earn more profits defeating the very purpose of financial inclusion.” It suggested that MFIs shouldn’t be allowed to get listed on stock markets. So far, only SKS Microfinance Ltd went public and raised $358 million, but several others are planning to raise funds through capital markets.
Blaming SIDBI and other banks for the present crisis, the government said that the banks did not follow norms set by the RBI while lending to MFIs. “There has been wide-spread violation of the RBI guidelines issued to the Banks in their letter dated 22nd November 2006. This calls for a detailed investigation and to fix responsibility on the banks for these violations,” it said in the report.
–Agencies