RBI sets 26% cap on microfinance loans

The Reserve Bank of India on Tuesday announced an interest rate cap of 26 per cent on micro loans for up to Rs 50,000.

The Reserve Bank of India on Tuesday announced an interest rate cap of 26 per cent on micro loans for up to Rs 50,000 ($1,124) and broadly accepted a panel’s recommendations for the sector in a move that could provide a boost to embattled microfinance firms.

The tenure for loans of more than Rs 15,000 is capped at 24 months with no prepayment penalty,and the borrower is given the option of choosing a weekly,fortnightly,or monthly repayment cycle,the Reserve Bank of India (RBI) said.

The interest rate cap set by the RBI is 2 percentage points more than what a panel,set up last October and headed by a central bank director Y.H. Malegam,had recommended.

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The RBI said microfinance loans given to rural households with annual income of not more than Rs 60,000,and to an urban or semi-urban household earning up to Rs 1,20,000,would be considered as priority sector loans by banks.

“These measures are much more relaxed than originally recommended by the Malegam panel and are fairly sensible,and gives enough breathing space to the sector,” Anurag Agarwal,senior vice president at Intellecap,a Hyderabad-based consulting firm,said.

The fast-growing microfinance sector suffered a setback last year when the southern state of Andhra Pradesh,home to the biggest tiny loans in the country,approved legislation to regulate the industry following complaints about high interest rates,aggressive recovery practices and overextended borrowers.

“We are particularly pleased to see that the RBI has re-affirmed priority sector status for microfinance and broadened some of the parameters,such as increasing the annual income limits for eligible households,” said S. Dilliraj,chief financial officer of SKS Microfinance ,India’s largest and only publicly listed microfinance company.

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Domestic commercial banks in India are required to give 40 per cent of their loans to the priority sector and the classification would enable easier flow of bank credit to the microfinance sector.

The RBI said microfinance loans should be made without collateral and banks must ensure a margin cap of 12 per cent.

Shares in SKS Microfinance were down more than 3 per cent at Rs 430 in a weak Mumbai market down 2.4 per cent,and well below a high of 1,491.50,reached shortly after a hugely successful public offer last August.