New Delhi: The finance ministry has opposed any cap on interest rates for small loans under the microfinance Bill. The bill, which was introduced in Parliament, is currently under the consideration of the standing committee attached to the ministry.
“Although some members in the standing committee want to put a cap on the interest rate on microfinancing, we are not in its favour as it can kill the institution of microfinancing even before it takes off,” a senior finance ministry official said.
He said the ministry favoured bringing in as many players to the sector as possible, hoping that competition will bring interest rates down to a reasonable level for small borrowers.
According to estimates, there are over 800 microfinance institutions operating in the country in various forms—trusts, societies, cooperatives and non-banking finance companies.
The Bill, which was introduced by finance minister P. Chidambaram, seeks to regulate small microcredit institutions through the National Bank for Agriculture and Rural Development, requiring them to meet stringent accounting standards. However, the Bill does not contain any provision regarding a ceiling on interest rates that could be charged from the borrowers.
Sources said due to differences among the members of the standing committee and opposition from the Left parties, the Bill could not get parliamentary approval during the Budget session.
The sources added that the finance ministry has brought to the notice of the standing committee that, at a time when money lenders and commission agents are charging interest at rates as high as 50-300%, it should not insist on putting any limit on interest rates.
“Any cap on interest rates would discourage big players such as private and foreign banks to lend to microfinance institutions. We are certain that with more competition, the interest rate would come down, presently in the range of 24-30%,” said an official.