India calls on lenders to cut rates for poor

New Delhi is moving to tighten regulation of India’s booming micro-finance industry amid public concern that local companies are charging poor borrowers with usurious rates of interest.

The finance ministry has requested state-owned commercial banks – which provide funding to an industry that lends tiny sums to the poor – to cap the rates the micro-finance companies can charge to end-users.

In a letter, the ministry suggests that poor borrowers should not be charged more than 24 per cent interest for a micro-loan.

Local micro-finance providers such as SKS, Basix and Spandana – which pay interest rates of 11-15 per cent for bank loans and other debt financing – charge rates of up to 30 per cent for loans extended to India’s version of “subprime” borrowers in rural areas and urban slums.

Alok Prasad, chief executive officer of India’s Micro-finance Institutions Network, which represents the country’s 44 biggest profit-oriented micro-finance companies, called the finance ministry directive “a bit ominous” for the industry, which has grown at a blistering pace by reaching out to those with no other access to the formal financial system. “A cap like this is very, very counter-productive,” Mr Prasad said. “We may end up creating a situation where access to formal funding to the poor gets diminished.”

Traditionally, impoverished Indians have relied on unscrupulous local money-lenders, who charge rates of up to 36 per cent a year and are notorious for brutal tactics against defaulters.

In recent years modern micro-finance specialists are credited with providing a better deal for the poor. These companies have seen their loan portfolio grow by 60-70 per cent a year for the last five years, with the biggest companies expanding even faster.

The industry now has about 30m borrowers, with an outstanding loan portfolio estimated at roughly $6.5bn. The average loan size is $250.

However, the recent $350m IPO by Hyderabad-based SKS, India’s biggest micro-finance company, has put a spotlight on the fortunes being made in the sector and has led to the public backlash.

Mr Prasad said the proposed interest rate cap would be difficult to implement and would hurt smaller micro-finance players.

If New Delhi was really concerned with reducing borrowing costs for the poor, he said, it should urge commercial banks to drop lending rates to micro-finance institutions.