Banks in India Charging 22% to 26% on Microloans to Poor Borrowers

Tuesday, December 2, 2014

When it comes to lending to the poor, it is not just the micro finance institutions that charge high interest rates, but even bulgebracket banks such as Axis Bank to YES Bank charge as much as 22% to 26% a year.

This is the trend that has emerged after the Reserve Bank of India allowed banks to engage microfinance institutions (MFIs) as business correspondents in June this year.

Banks have access to low cost deposits unlike MFIs, giving access to lower cost of funds, but that does not translate into lower lending rates. In reality, private banks charge as much as micro lenders such as Bandhan Financial Services or SKS Microfinance do. “As the first set of entrants, banks are making the most of it before other creditors get comfortable with the model and start providing funds with lower rates,” said Ananda Bhowmik, senior director at India Ratings.

RBI says that even though interest rates have been deregulated, charging interest beyond a certain level is considered usurious and can neither be sustainable nor be conforming to normal banking practice. The central bank remained silent on what could be the “certain level” for banks while it has put a ceiling on MFIs’ lending rate which ranges between 26% and 27% a year.

Source: The Economic Times (link opens in a new window)