Allow banks to charge more for small loans: Nabard

At a time when the government is pushing banks to go for financial inclusion, the National Bank for Agriculture and Rural Development (Nabard) has suggested that banks be allowed to extend small credit at higher rates.

The Reserve Bank of India (RBI) should allow extension of micro credit at higher rates so that banks can at least meet their processing cost, according to Nabard Executive Director Prakash Bakshi.

Banks work on thin margins as RBI has mandated that no bank can charge more than the prime lending rate for loans up to Rs 200,000. On the other hand, microfinance institutions (MFIs) charge between 25 per cent and 50 per cent, with their average lending rate hovering around 30 per cent.

Bakshi said there should be a level-playing field between regional rural banks (RRBs) and MFIs, which are free to fix their lending rates. “MFIs are charging much more and nobody questions them. It is one policy intervention that is required immediately. You cannot force somebody to do business at 10 per cent when the cost is 15 per cent,” he said.

Bakshi said a 25 per cent rate was reasonable when recycling of activity was fast. But where economic activity took one year, like in agriculture, a lender could not charge such high rates, he said. “That is why the government is providing subsidy here.” He agreed there was a problem of over-lending in some pockets of southern India, with too much money chasing too few people. To build a relationship between clients and staff, Nabard has designed a training programme for not just the banking staff but also its messengers, peons and watchmen.