Major public sector banks and Nabard, the proposed regulator for microfinance institutions(MFIs) are turning the heat on MFIs? lending practices. Banks have started amending terms and conditions for lending to MFIs, in order to instill discipline in their functioning.

New terms mandate lower rates for end-customers, daily reducing balancing norms, bar on evergreening lending portfolios and a mandatory audit statement from a chartered accountant to monitor the end use of funds.

The country?s largest lender State Bank of India (SBI) with a Rs 800-crore MFI portfolio with 200 customers has laid out a three-pronged strategy. First, SBI will ask MFIs to disclose their lending rates; Second, it will ask MFIs to get credit ratings from a professional rating agency. Third, the bank will strengthen its base among self help groups (SHGs) whom it provides loans at 10%. The bank is planning to raise its SHG customer base to 21.5 lakh from 18 lakh.

Said MI Dholakia, deputy general manager and head of micro credit & microfinance, SBI: ?We plan to pursue our MFI clients to adopt fair loan practices, good recovery practices and finally, charge reasonable interest rates… If they continue to charge high rates, their rating may go reverse, which will make their chances of getting fresh loans from SBI remote, said Dholakia.

SBI?s MFI borrowers include NGOs and NBFCs. While NGOs charge 16-22%, NBFCs levy up to 26%, added Dholakia.

Ramnath Pradeep, CMD, Corporation Bank confirmed the development, saying the bank has succeeded in forcing MFIS to charge less.?Bandhan (an MFI) has written to us that it will cut its lending rates to 19% from 26%. We will ensure same from all MFIs we deal with,? said Pradeep. Corporation Bank has an outstanding of Rs 600 crore to MFIs.

?We are also asking MFIs to facilitate opening of accounts of their borrowers in our bank so that we will start our direct banking relationship with them. We are already providing overdrafts for these accounts,? he said.

A senior Bank of India official said the bank plans to demand an undertaking from MFIs to disclose their interest rates. ?Normally, we want our MFIs to charge not more than 24%. We are also strengthening our base among SHGs, as to give a message to MFIs not to charge high rates,? said the official.

Bank of India has 2.12 lakh SHG customers in its fold with an exposure of Rs 720 crore.

?Normally, we charge 11-11.5% from MFIs and we are asking them not to charge more than a spread of 3%. The maximum rate charged by MFIs should be around 20%,? said AK Dutt, executive director, Dena Bank, which has an exposure of Rs 300 crore.

?We are asking MFIs not to charge over 24%. Whenever we find that they are charging higher, we have decided not to renew their account,? said Archana Bhargava, general manager, Punjab National Bank. PNB is asking MFIs not to have a spread of more than 5% over the 11-12% at which it lends to these institutions. ?But, the problem was, they don’t have proper auditing and there is a lack of securities, said Bhargava. Nabard chairman C Sarangi said the institution wants to bring in more competition. ?Today, Nabard has 70 lakh SHGs with a savings of Rs 6,000 crore in banks. So, there is no truth in saying that the poor can’t save and that they are not bankable lot,? he explained. NABARD is implementing strategies to grow its SHG fold 10 times soon.

KJ Udeshi, chairman, Banking Codes & Standards Board of India, observed: I fear high MFI lending rates may lead the people getting into debt-trap in the name of lifestyle change. Hence, regulation becomes essential in that aspect.?