Micro lending institutions should fix interest rates consistent with repaying capacity of borrowers, Prime Minister's Economic Advisory Council Chairman C Rangarajan said here today.
"Fix interest rates in a manner in which it is consistent with the repaying capacity of the borrowers. Now, fixing the interest rate independent of the repaying capacity of the borrower is asking for disaster.
"I think that's where things went wrong," Rangarajan said during a programme in Centre for Economic and Social Studies.
He was responding to a specific query on capping interest rates charged by micro finance institutions (MFIs).
The Micro Finance Institutions (Development and Regulation) Bill, 2012 is currently being scrutinised by a Parliamentary Standing Committee.
It seeks to provide the RBI with powers to regulate the micro finance industry and fix interest rates ceiling on loans to be provided by lender.
The Bill was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states.
In the wake of a spate of suicides by borrowers allegedly due to the coercive recovery practices by the MFI agents in Andhra Pradesh, Andhra Pradesh had issued an Ordinance made that into an Act.
The legislation clipped the wings of micro finance institutions. The Act mandated the MFIs to take permission from the government before lending to borrowers and also insisted the collection cycle to be monthly, instead of weekly.
Microfinance Institutions Network (MFIN), a self regulatory body of MFIs, has been requesting the Reserve Bank to fix the margin cap for individual loan to borrowers at 12 per cent, instead of 10-12 per cent earlier.
In a circular issued by the RBI on August 3, the cap on margin have been revised to 10 per cent for large MFIs (loans portfolios exceeding Rs 100 crore) and 12 per cent for amounts less than Rs 100 crore.
When contacted, Alok Prasad, MFIN CEO said their request on the margin cap is still pending with the RBI.
"It is Malegam's committee suggestion to put interest cap and also on margin. We have to live with that. That is considered to be to be reasonable and appropriate," Rangarajan said.
He said it is "unfortunate" that in the whole episode even the MFIs which are operating with the right principles have also been affected.
"...we have to restate the policy to be followed by the MFIs. I would say that if the MFIs follow the original principles of enabling the individuals to raise the income capacity by borrowing then it will be good idea," Rangarajan added.