RBI allows 12% margin cap for large MFIs

Last year, RBI had removed overall rate of interest cap of 26% but however had imposed margin cap of 10% on large MFIs and 12% for small MFIs

The Reserve Bank of India today decided to allow margin cap of 12 per cent for large microfinance institutions (MFIs) up to March 31, 2014. MFIs having loan book of over Rs 100 crore are classified as large MFIs by the central bank. In August 2012, RBI had removed the overall rate of interest cap of 26 per cent, but imposed a margin cap of 10 per cent on large MFIs and 12 per cent for small MFIs.

However, sector had represented to RBI that a sudden mid-year change in margins would cause operational problems for MFIs. Alok Prasad, chief executive officer of Microfinance Institutions Network (MFIN), industry association of MFIs, had told Business Standard, “It was explained (to RBI) that MFIS would need time to make the shift to a lower cap.”

Earlier, RBI, in December 2011, had applied the new norms for the MFI sector based on the Malegam committee report. Those norms had included 12 per cent margin cap for all MFIs irrespective of size with the interest rate cap of 26 per cent. RBI had also allowed MFIs to notionally reckon the Andhra Pradesh portfolio in the net worth of the company, and, thus, didn’t impact capital adequacy ratio of MFIs.