Banks are scared that they may not be able to prevent microfinance institutions from levying high interest rates to borrowers. So they should introduce a system that would help to put a control on the lending process of MFIs.
Finance ministry has told the banks that MFIs to whom they lend money should charge interest rates only up to 24% to ultimate borrowers.
To honour the directive, few banks have introduced a clause when lending to MFIs which states that they cannot lend to borrowers at steep rates. But they have not inserted a limit on the highest sum at which MFIs can give loans to borrowers.
RN Pradeep, Corporation Bank CMD said, “We will have to take an undertaking from MFIs that they will not charge more than 24%. But the better way of doing it would be RBI asking MFIs to disclose it on their balance sheet about the loan given above 24%”.
A CMD of another bank said, “How this can be translated in reality is not known. What happens if MFIs lend more than 24%? Secondly, banks are not the only source of funds for MFIs. So, technically they can still continue to charge higher rates to the final borrowers”.
RIS Sidhu, chief GM of Punjab National Bank said that the aim to put a limit of 24% as the highest rate beyond which MFIs cannot lend is a highly positive step. He added, “One, it will make banks more conscious and active on the asset side of lending in rural India and secondly, as PSU banks become more active in rural space, competition will drive down rates”.