RBI to cap interest charged by MFIs at 26%

Also rules out raising of margin cap, the difference between income earned by MFIs and cost of borrowings, from 10% to 12%

The Reserve Bank of India (RBI) today said micro-finance institutions (MFIs) cannot charge interest rate of more than 26%.

"Charging more than 26% is exploitation. If you are not exploiting a person, then it is a reasonable rate. So, the RBI has fixed the rate at 26%," Deputy Governor of RBI K C Chakrabarty said here.

"MFIs are basically relevant because the banking system in the country is inefficient. The MFIs will be relevant for the next 10 to 20 years," he said at a seminar on MFIs organised by Indian Chamber of Commerce here.

Chakrabarty advised MFIs not to scale up their operations without understanding their limitations.

He said MFIs should extend loans for income generating activities and not for consumption purposes. They should also focus on the credit-worthiness of borrowers, he said.

The RBI official also ruled out raising of margin cap (the difference between income earned by MFIs and cost of borrowings) from 10% to 12%.

He said inefficient MFIs should not be in the system as they had the potential to bring in a financial crisis.