India’s MFIN Agrees to Cap Interest Rates at 24 Percent in AP

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Nov. 5 – India’s Micro-Finance Institutions Network (MFIN) agreed to collectively cap their interest rates at 24 percent in Andhra Pradesh, a state in southern India. Banks – state-owned and privately held, foreign and local – have over US$6 billion dollars (Rs.27,000 crore) worth of exposure to microfinance companies in India, which currently borrow at rates of 11 percent to 15 percent and lend to impoverished Indians at rates of up to 30 percent.

The lending rate cap would start in Andhra Pradesh, but extend to all parts of India eventually. The current peak interest rate in Andhra Pradesh, where micro-finance institutions (MFIs) such as SKS Microfinance engage in majority of their business, but also where they feel the brunt of government and public scrutiny, is close to 60 percent according to Business Line.

The move comes in the wake of the state government of Andhra Pradesh’s decision to ban MFIs from collecting payments in early fall. The government has since lifted the ban in late October, though MFIs are choosing to abide by the government’s ordinance to collect repayments in monthly installments rather than their usual practice of weekly collections.

On Wednesday, AP’s state cabinet approved the Andhra Pradesh Micro-Finance Institutions (Regulation of Money Lending) Bill 2010, which tightens regulations for the microfinance industry. The law, if approved in assembly during this winter session, will impose a penalty of Rs.1 lakh, or imprisonment up to three years, or both for lending without prior registration. It also aims to prevent multiple loans being given to a single household and to force microfinance companies to file with the registration authorities to verify adequate credit on the part of the borrower before lending. Giving loans without filing for registration is punishable by imprisonment up to three years, or a fine up to Rs.1 lakh, or both.

MFIs, while welcoming the regulations, reacted sharply to the rule to take approval from authorities for assessing a borrower’s repayment capability.

“There is going to be too much red-tape. There are lakhs and lakhs of borrowers in the state and making applications before giving loans to each one of them will involve mountains of paper work, delays and a lot of red tape. The MFIN has already made it compulsory for all MFIs to cross-check with a database on borrowers before giving loans. I think this was enough to make MFIs resist from irresponsible lending,” CEO of Basix Micro-finance Sanjeev Vishwanathan told the Indian Express.