Yunus for legal cap on microfinance rates

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Feb 2007
Mumbai , February, 02 2007 - One of the founding fathers of microcredit and Nobel peace laureate Mohammed Yunus is in favour of a regulatory ceiling on interest rates charged by microfinance institutions. However, Reserve Bank of India is not in favour of regulating NBFCs.

The founder of the Grameen microcredit movement in Bangladesh feels that finance companies that charge high rates are not interested in reaching the poor.

I have always advocated creating a legal framework because legal framework creates a mould within which one can operate and without which the mould cannot work,” Mr Yunus said.

However, speaking at a seminar on microfinance, RBI chief general manager in charge of rural planning and credit CS Murthy said RBI was not in favour of regulating MFIs as regulations often tend to be stringent which involve huge compliance costs, which many MFIs might not be able to incur. However, if MFIs want to raise deposits, they will be regulated like NBFCs.

Commenting on the controversial issue of the ideal rate of interest, Mr Yunus said: “If you charge cost of funds plus 10 percentage points, then you are in the green zone. If it is cost plus 10-15%, then you are in yellow. If you charge cost plus 15%, then you are in the red area. This means you are not interested in reaching the poor,” said Mr Yunus.

When asked that many players in the west are showing keen interest in the Indian market, Mr Yunus said they should be allowed if they contain their interest rates at cost of funds plus 10-15%.

Speaking at the India liaison office of the Grameen Trust in Mumbai on Thursday, Mr Yunus said India, which was achieving record growth rates, needs to make more effort to make growth inclusive as the poor, representing the tail of the economy, were not able to catch up with the economic development managed by the top 2%. He pointed out this as an area where a crisis is brewing.

He called for all-inclusive growth and that credit is one of the important empowering tool which is decided by banks. And, financial inclusion by making credit accessible to the poor is one of the ways to bring down poverty. In a self-help group, all members are not poor, but the focus should be catering to only the poor.

Bangladesh has managed to bring down poverty by 2% every year and is looking at completely eliminating poverty by 2015. The Grameen Bank has reached 7 million households and hopes to cover the entire poor population.

As for regulation, the regulator could select MFIs in a particular state which has many successful MFIs and give one of them a bank licence and try a pilot project and allow it to accept deposits and other banking facilities. He added that once there is a level of comfort with the way the MFIs are functioning, they can be allowed to expand to other states.

On the tussle between the governments of a couple of southern states and some MFIs, Mr Yunus said MFIs had fallen foul of the state because they were charging very higher rates of interest.

 

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