Financial Lifeline or Profit Trap? RBI Questions MFI Interest Rates

The Reserve Bank of India (RBI) has raised concerns over microfinance institutions (MFIs) charging significantly higher margins despite access to low-cost funds. RBI Deputy Governor M. Rajeshwar Rao criticized certain lenders for disproportionately increasing their interest rates, warning that such practices could invite regulatory action.
 

Key Highlights:
 

Regulatory Freedom Misused: The RBI had lifted the interest rate cap in 2021, allowing MFIs to set their own rates. However, some lenders have leveraged this freedom to hike margins excessively.
 

Persistent High Interest Rates: Despite policy changes aimed at improving affordability, pockets of elevated interest rates continue to exist in the microfinance sector, surpassing industry norms.
 

Funding Challenges for Smaller MFIs: A shift in banking behavior has made it harder for smaller MFIs to secure loans, forcing them to rely on costlier non-banking financial companies (NBFCs).Potential Regulatory Action: The RBI has hinted at stricter oversight if MFIs fail to pass on benefits to borrowers.

 

With microfinance playing a crucial role in financial inclusion, the RBI’s scrutiny signals potential policy adjustments to ensure fair lending practices.

 

Sources: Business Standard, Policy Circle, RBI Notifications