Charge high rates, but be transparent, MFIs told

Microfinance institutions have finally got some support, with the Survey defending the high interest rates charged by them.

While pointing out that interest rate caps are necessary, the Survey says there are enough reasons for MFIs charging 24-30 per cent to poor borrowers, but emphasised the need to disclose the interest rates in a transparent manner.

The cost of lending to many small borrowers is higher than financing the needs of a few large borrowers, the Survey said. Also, that to a poor borrower, the only alternative to a loan from a microfinance institution is money from the informal moneylender whose interest charges tend to be much higher.

The Survey is not in favor of announcing blanket relief to defaulting borrowers since that will encourage farmers to default and will do more damage than good. “Such practices would lead to the MFI sector disappearing,” it said.

The Survey says that the government has to take measures to ensure that MFIs make the terms of contract transparent to the borrowers.

“This is more important than setting caps on interest rates and other restrictions on the terms of the contract,” the report said.

It pointed out that the MFI sector has been crucial in extending benefits of credit to 30 million people throughout India and hence requires careful scrutiny in shaping up norms and limits. Hence, there is a need of an intelligent regulatory structure which protects borrowers and at the same time allows the microfinance sector to flourish.