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Prior to RBI's order, MFIs prepare to lower rates
There has been no order from the Reserve Bank of India (RBI) yet, but microfinance institutions and their investors are reading the writing on the wall. They are preparing to lower the rates they charge their borrowers, before the issue becomes a political hot potato, reports CNBC-TV18’s Gopika Gopakumar.

Microfinance institutions are coming under greater scrutiny for charging higher interest rates to the poor. In a recent letter to the public sector banks, the government has asked banks to ensure that their MFI borrowers cap their lending rates at 24%. But are these MFIs serious about bringing down rates? The industry body of microfinance institutions MFIN claims that interest rates have already started declining.

Alok Prasad, CEO, MFIN, said, “There is a broad consensus to bring down rates as best as we can. The ability of each institution is bound to be different. Today the ability of the newer and small institutions to bring down rates is somewhat lower as compared to larger institutions that have much more scale and efficiency.”

Investors like private equity players too endorse a lower interest rate regime.

Paresh Patel, Founder, MD and CEO, Sandstone Capital, said, “I think as rates go lower, the business proposition for new entrants gets worse and worse. The ability for small guys to sustain themselves won't be there. For large players, because of the scale they have lower rates are not such a bad thing. If rates go lower, I do think that it's better for the big folks as they can manage that through lower cost of funds, and lower operating costs.”

The Reserve Bank of India is also examining different issues concerning microfinance institutions. According to Prasad, RBI may wait till 2012 before it takes a final call on imposing stringent rules like capping interest rates or even removing special status for MFI loans.

“The report seems to be suggesting between now and March 2012 the MFIs will be kept under tighter supervision. I don't think it is saying that PSL benefits should be taken away,” Prasad said.

Experts argue that any change in regulatory norms on MFIs should only happen over a period of time. Also they add that greater competition from banks will force microfinance institutions to bring down their rates.
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