RBI against cap on moneylenders

A Reserve Bank of India (RBI) technical group has suggested that states lay down the maximum interest rates that moneylenders can charge from time to time.

It has argued against prescribing a cap under the state legislation to ensure that the rates are aligned with the market. According to the group, fixing market-determined interest rates would help bring more unregistered moneylenders into the legislation's fold.

The technical group to review the legislations on moneylending formed in May 2006 found that some of the state legislations on moneylending had already prescribed the ceiling on rates that could be charged by moneylenders.

The group felt that the existing ceilings were out of sync with the market reality and state governments should have the flexibility to adjust the rates according to market realities.

The group has recommended that state governments notify the maximum rate to be charged from time to time. If the state government found this cumbersome, it could together with the State Level Bankers' Committee (SLBC) link the rate to a benchmark with a maximum mark-up taking into account other costs, ease of access, doorstep delivery and a reasonable margin.

While determining the mark-up, the states could also look at the range of interest rate charged by microfinance institutions in the area to ensure reasonability.

"Fixing of rates linked to the market-determined benchmark will make more and more unregistered moneylenders view the legislation favourably," said the group.

According to the AIl India Debt and Investment Survey, the share of moneylenders in the total cash dues of rural households increased from 17.5 per cent in 1991 to 29.6 per cent in 2002. On the other hand, the share of institutional agencies declined from 64 per cent to 57.1 per cent over the same period.

Out of every Rs 1,000 outstanding of farmer households in the country, Rs 257 was sourced from moneylenders.

The rates of interest charged by creditors ranged from 12 per cent to 150 per cent a year annum although the average rate of interest ranged from 18 per cent to 36 per cent a year. Some studies have estimated the transaction cost for small loans of Rs 15,000 to Rs 20,000 at 5 to 6 per cent.

The group has also said that the states' moneylending legislations should link formal and informal credit providers by way of accredited loan providers (ALPs) to leverage on the dominant presence of moneylenders.

The ALPs would do business independently of banks at their own risks, with banks providing the required funds for on-lending. The ALPs would also act as competitors to moneylenders, bringing in fair practices and competitive rates within the informal credit mechanism.

The recommendations include treating the advances made by banks to ALPs as priority sector lending. This would encourage banks to lend through this channel as an additional business.

Existing moneylenders, input dealers, agricultural traders, commission agents, agricultural output processors, vehicle dealers, oil or petrol dealers could be considered as ALPs.

The agreement between banks and ALPs should include safeguard measures, which would enable banks to inspect the books of the ALP.

The group has advocated that while making registration for moneylenders compulsory, unregistered moneylenders should be penalised.

The group recommends using alternative dispute resolution mechanisms such as Lok Adalat and Nyaya Panchayats to settle disputes on loans up to Rs 50,000.

The legislation should also require state governments to place an annual report on the administration of the legislation before the state legislatures.

The central bank has called for feedback on the recommendations made by the technical group by August 24.

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MARKET-FRIENDLY

A Reserve Bank of India (RBI) technical group has suggested that states lay down the maximum interest rates that moneylenders can charge from time to time

It has argued against prescribing a cap under the state legislation to ensure that the rates are aligned with the market

According to the group, fixing market-determined interest rates would help bring more unregistered moneylenders into the legislation's fold

According to the AIl India Debt and Investment Survey, the share of moneylenders in the total cash dues of rural households increased from 17.5 per cent in 1991 to 29.6 per cent in 2002