Govt against regulating interest rates charged by MFIs

The government today said it is not in favour of regulating interest rates charged by micro-finance institutions but emphasised that there should be transparency in amount they charge from the borrowers.

"The aim of regulation should be not so much to fix prices as to make sure that the terms of lending are transparent to the borrowers and there should be clear guidelines on the methods of recovery," said the Mid-Year Analysis of the economy for 2010-11 tabled by Finance Minister Pranab Mukherjee in Parliament.

In their zeal to attract borrowers, it said, lending agents often misrepresent the interest rate that borrowers have to pay.

Borrowers are systematically deluded about simple interest rates and compound interest rates, it said, adding people end up borrowing money under terms, which, if they had fully understood, they would never have accepted.

"This is what needs to be regulated," it said.

"While we do need to regulate micro-finance, we must not make the mistake of regulating it out of existence," it further pointed out.

Highlighting the importance of MFIs, it said that it has to be understood that by making credit available to the poor it may also have saved lives.

Further, in its absence, the poor would turn to the informal village moneylender who often charges interest rates as high as 10 per cent per month, which compounded to a year, turn out the be over 200 per cent per annum, it added.