Regulation of Interest Rates Charged by MFIs

Posted on    23 November 2010


Regulation of Interest Rates Charged by MFIs


The Small Industrial Development Bank of India (SIDBI) has reported that SKS Microfinance Ltd. (SKS), the only Micro Finance Institution (MFI) in India to be listed on the Bombay Stock Exchange/National Stock Exchange (BSE/NSE) had gone for an initial Public Offering (IPO) in August 2010. Subsequent to the IPO, the Board of SKS had taken a decision to terminate the services of Shri Suresh Gurumai, CEO.

While Reserve Bank of India (RBI) does not regulate the interest rates charged by Micro Finance Institutions, it has issued instructions on a Fair Practice Code to be adhered to by all Non-Banking Financial Companies (NBFCs) in terms of which the NBFCs should not charge exorbitant rates of interest and resort to undue harassment viz., persistently bothering the borrowers at odd hours, use of muscle power for recovery of loans, etc. The Boards of NBFCs were advised to lay out appropriate principles and procedures and determine interest rates, processing and other charges. 

The Government of India had in September, 2010 written to all Chief Executive Public Sector Banks advising them to ensure that the rates of interest charged by the MFIs to the eventual beneficiaries are reasonable. The Banks were also advised to ensure that MFIs do not resort Officers of to ever greening of the loans. 

The Reserve Bank of India has since constituted a Sub-Committee of the Central Board of Directors to look into various issues in this sector, including ways and means of making interest rates charged by them reasonable. Shri Y.H. Malegam, a senior member on the Central Board of Directors of the Reserve Bank of India will chair the Sub-Committee. The Sub-Committee will submit its report in three months. The Department of Financial Services proposes to introduce the Micro Finance (Development & Regulation) Bill, 2010 after taking into account the views of RBI and the Malegam Committee recommendations. 

This information was given by the Minister of State for Finance, Shri Namo Narain Meena in written reply to a question raised in Rajya Sabha today. 

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