The Reserve Bank of India (RBI) has raised questions over nationalized banks lending to for profit microfinance institutions at below market rates in a recently held meeting. Many nationalized banks lend to MFI’s with the aim of meeting their priority sector lending targets at interest rates which are lower than those charged to Leasing and Housing NBFC’s.
The issue was raised by RBI in a recent meeting with chairmen of nationalized bank, where the central bank is believed to have asked lenders to review their microfinance portfolios. The issue was discussed intensely in the first meeting undertaken by Mrs Usha Thorat after taking over the portfolio of financial inclusion which was previously held by deputy governor KC Chakrabarty.
The central bank’s concern stems from the fact that microfinance institutions are lending at rates which the central bank has began to sees as usurious. Central bank officials feel that by lending at around 13%, banks are helping microfinance institutions earn super profits through double digit margins.
Banks have been extending loans to MFIs since such lending can be classified as a priority sector loan , which is a part of the direct lending target that each bank has to achieve as per RBI guidelines. The central bank has proposed that banks should focus on lending largely to non profit institutions and not those that have been started to generate profits for vc’s and hedge funds.
Sources reveal that nationalised banks have however defended their lending to For Profit MFI’s and told the RBI that there is merit in lending to for profit MFIs since it is easier to appraise such companies. Also, banks feel that lending to For Profit MFI’s is much more viable than lending to NGO’s.
Concerns over the high lending rates of MFIs have been raised by other government officials as well. On Friday, C Rangarajan, chairman of the prime minister’s Economic Advisory Council had warned that high interest rates could hamper the cause of Microfinance Institutions in India.