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The Reserve Bank of India (RBI) has removed the 26% cap on the interest rate that a microfinance company can charge its borrowers and has prescribed a new method of determining the rate. The central bank has said that MFIs can arrive at their lending rate by calculating their cost of funds and adding the prescribed margin.
Alternatively, the MFI can charge an interest rate equal to 2.75 times the average of the base rates of the top five commercial banks. The MFI will have to adopt the lower of the two, the RBI said. The margin that a large MFI, registered as a non-banking finance company, is allowed to have will be capped at 10%, while, for the rest, it would be 12%.
The RBI will prescribe the average base rate of the top five banks every quarter for MFIs to price their loans in the ensuing quarter, the RBI said.
“The above instructions will come into effect from the quarter beginning April 1, 2014. The bank will announce the applicable average base rate on March 31, 2014, and every quarter end thereafter,” the RBI said in a release on Friday.
The central bank had mandated the cap on margins in August 2012 in addition to the interest rate cap of 26%. The interest rate cap was prescribed in 2011 as recommended by the Malegam committee. Margins of most MFIs are currently around the 12% mark.