RBI gives directions to NBFC-MFIs on borrower interest rates

The Reserve Bank today directed the NBFC-MFIs to keep interest rates for their borrowers lower than 2.75 times the average base rate of five largest banks.
The interest rates have also been directed to keep lower than the cost of funds plus the prescribed margin.
As per RBI norms, NBFC-MFIs (Non Banking Financial Company-Micro Finance Institutions) are required to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap.
The interest rate cap on loans given by MFIs has been fixed at 26 per cent. The cap on margins are not expected to exceed 10 per cent for large MFIs (loans portfolios exceeding Rs 100 crore) and 12 per cent for others.

"On a review, it has been decided that the interest rates charged by an NBFC-MFI to its borrowers will be the lower of (i) the cost of funds plus margin and (ii) the average base rate of the five largest commercial banks by assets multiplied by 2.75," RBI said in a notification.
The base rates of the five largest commercial banks shall be advised by it on the last working day of the previous quarter, which will determine interest rates for the ensuing quarter, RBI said.

The directions will come into effect from the financial year beginning April 1, 2014.

"The bank (RBI) will announce the applicable average base rate on March 31, 2014 and every quarter end thereafter."
Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) were created as a separate category of NBFCs in 2011 to address the concerns in the MFI sector.