The legislation on micro-finance institutions, which is to be introduced in Parliament in the ongoing Budget session, will not cap interest rates; instead, it will empower the regulator do so if the ground realities warrant intervention.
The proposed Bill has attracted some controversy after the Communist parties criticized it for not capping interest rates, which normally vary between 20% and 40%, well above the commercial bank-lending rate. While the government is not opposed to the suggestions made by the Left, it has chosen not to specifically include a rate in the Bill and thereby provide more flexibility to the regulator.
The Micro Financial Sector (Development and Regulation) Bill, 2007, will empower the sector’s regulator, National Bank for Agricultural and Rural Development (Nabard), to take a call on the matter, said a finance ministry official.
The official clarified that this was being done to allow Nabard the flexibility in its interventions on the interest rates. If a cap on the rates was specified in the Bill, every time Nabard proposed a change, the government would have to approach Parliament with fresh amendments to the legislation.
In a larger context, the Bill aims to create conditions in the micro-finance sector that would bring down the borrowing cost and get more people into the organized financial system, said ministry officials. The government estimates the sector needs something between Rs75,000 crore and Rs1 lakh crore in funding.
The Left’s concerns were basically due to the difference in lending rates. A combination of small-sized loans and doorstep service in micro finance, unlike the regular banking sector where people visit branches, drive up the costs.
“An important reason for high interest rates in the micro-finance sector is that loans are free of collateral and therefore, the risks are higher,” said N.R. Bhanumurthy, associate professor at the Institute of Economic Growth.
Even Bangladesh’s Grameen Bank, jointly awarded the 2006 Nobel Peace Prize along with its creator Muhammad Yunus, charges 20% when they borrow for income-generating activities, and pays between 8.5% and 12% on its deposits.
The Bill, accepting suggestions made by the Left, does not aim to regulate self-help groups, an important link in the micro-finance chain of credit. Micro-finance institutions that accept deposits from members would be subject to regulation, and other institutions in the sector would only be asked to furnish operational data.