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Indian MFIs should not charge more than 20% int rate: Yunus

india Updated: Feb 27, 2011 20:59 IST

Criticising the country's micro finance companies for ignoring social service activities and overcharging, micro credit guru and Noble laureate Muhammad Yunus said that the interest rate on such loans should not exceed 20%.

The Indian micro finance companies, Yunus regretted, "have diverted from the basic principle behind formation of micro credit firms. They are now focusing on profit making."

"Interest rates should be as much that the MFIs should be able to recover their cost of servicing the loans. Anything above 20% rate should be profit making MFI," Yunus said in an interview.

High interest rates and coercive mode of recovery has brought the micro finance sector in India under scanner. Specially in Andhra Pradesh where there has been cases of farmer suicide following MFIs charging exorbitant interest rates.

Yunus said if a micro finance company charges interest rate above its 'cost of fund + 15%' it means that the firm is earning profit.

"Micro finance should be a social business. If companies are focusing on generating profits out of MFI business, they should start calling themselves commercial micro credit firms," he said.

In India there were 1,659 MFIs availing a total credit of Rs 13,955 crore from the banking system, and benefiting about 30 million people, as of March 2010.

The MFI sector has come under scanner after cases of suicides were reported in Andhra Pradesh over allegations of coercive recovery tactics and high interest rates.

In October 2010, the Reserve Bank constituted the Malegam Committee to study the state of MFIs in the country.

The committee, which submitted its report on January 19, suggested among other things capping interest rate at 24% for MFI loans.

Yunus created the concept of micro finance in Bangladesh in the late 1970s by extending credit to rural women skilled in local handicrafts and saving them from the money lenders, who used to charge them high interest rates.

Yunus created the Grameen Bank in Bangladesh, for extending funds to the rural population or people at the grassroot level, to save them from the local loan sharks. The model became extremely successful, as almost all loans were repaid on time.

Grameen Bank currently offers interest rates under declining balance method in four slabs -- 20% for income generating loans, 8% for housing loans, 5% for student loans, and 0% (interest-free) loans for struggling members (beggars).

The committee also suggested that small loans cannot exceed Rs 25,000 and asked for creating a separate category of non-banking financial companies (NBFC-MFI) for the MFI sector.

Asked if Yunus was interested in opening a Grameen-model village banking in India, he said if someone comes with funds, then he is willing to develop such a bank in India.

"We are developing such banks in Costa Rica, New York. Also in San Fransisco, Brazil. We are willing to develop the model in India too if anyone is willing to put in funds," he added.