Stop lending to MFIs with interest rates above 24%, India tells public sector banks

> Posted by Beth Rhyne

One cap can have a big impact

In a move that could prove challenging for India’s microfinance practitioners and serve as a warning for the industry worldwide, the Government of India last week directed public sector banks not to lend to MFIs with interest rates above 24 percent. While many Indian MFIs can offer services at a 24 percent interest rate and remain sustainable, this is a strong move in the direction of interest rate caps. Historically, caps have made it harder for providers to reach out to very poor and remotely located clients.  Caps also tend to dampen product innovation and may create perverse incentives for the better-off to obtain loans more suited to the poor, crowding out credit to the low-income segment. There are better ways to make prices more affordable.
For more on the thorny issue of microfinance interest rates, I invite you to check out my recent Huffington Post article on the subject and for an in-depth look, to consult the Smart Campaign paper on responsible pricing.
For more information, sign up for updates from the Financial Inclusion 2020 campaign.
Flickr credit: Mykl Roventine

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