MFIs agree to reduce interest rates to 24%- Business News

MFIs to reduce interest rates

After a meeting with financial servies secretary R Gopalan, the institutes have agreed to cut rates they charged from borrowers to 24 per cent from the earlier 34 per cent.

  • New Delhi,  November 6, 2010  
  • |  
  • UPDATED   13:13 IST

Micro finance institutions (MFIs) have agreed to reduce interest rates they charged from borrowers to 24 per cent after a meeting with financial services secretary R Gopalan here.

A cut in rates comes from as high as 34 per cent, in the backdrop of an unsavoury situation in Andhra Pradesh, where many borrowers have committed suicides apparently due to coercive methods adopted by MFIs to recover money.

Addressing a select group of newspersons after meeting Gopalan and other officials in the finance ministry, Micro Finanance Institutions Network (MFIN) CEO Alok Prasad said: "CEOs of top five MFIs have said they would reduce interest rates to 24 per cent initially to borrowers in AP.

"We see the rate good enough, as it is the same at which the finance ministry has asked the public sector banks to lend to MFIs."

In September, the finance ministry had asked state-owned banks to ask MFIs to cap their lending rates in the range of 20-24 per cent as a precondition to access bank finance.

The top five companies included the country's only listed MFI SKS Microfinance, embroiled in a controversy over sacking its CEO Suresh Gurumani. Basix, Spandana, Share Microfin and Asmitha Microfin were the other four.

MFIs are in the business of extending loans in rural areas, mainly unbanked areas. About 85 per cent of the loans given by MFIs come from banks. As of September quarter, the MFIs have lent over Rs 30,000 crore ($6 billion) to over 3 crore customers.

While the banks charge interest rates in the range of 9-14 per cent on loans given to MFIs, some MFIs in turn charge as much as 34 per cent from their clients.

At present, MFIs are not regulated. The Reserve Bank on Tuesday had said the committee set up to study the MFI industry situation would submit its report by January.

The situation in Andhra Pradesh was discussed with Gopalan and other officials, MFIN President Vijay Mahajan said. He further added if the situation was not taken care of, then it could create a systemic risk.

"Our outstanding loans in AP is Rs 9,000 crore. Initially we had a collection rate of 35-40 per cent, but following the Andhra Pradesh State Ordinance it is declining," Mahajan said.

Following reports of suicides by borrowers apparently due to coercive methods of MFIs, the Andhra Pradesh government had on October 15 promulgated an Ordinance which made it mandatory for all MFIs in the state to register with the district authority withing a week.

The Ordinance had crippled the day-to-day activities of MFIs, which last week got an extension by three weeks from the Andhra Pradesh High Court to register themselves.