RBI mulls different MFI loan limits for rural, urban areas

The Reserve Bank of India is likely to set different credit limit for loans extended to rural and urban borrowers by micro finance companies, while recommending a 24 per cent interest rate cap on such loans.

An announcement to this effect is expected to be made by the central bank in its annual credit policy for 2011-12 on Tuesday, sources said.

In January this year, a Reserve Bank Committee, headed by Y H Malegam, had suggested a cap on the interest rates charged by micro finance institutions at 24 per cent and also limiting the total loan cap to an individual at Rs. 25,000.

Sources said after extensive discussion with the stakeholders, the RBI has come to the view that the quantum of loan extended to customers should depend on different parameters.

As such, the individual loan cap as suggested by the Malegam Committee is likely to be tweaked and the RBI would announce different limits for rural and urban customers, sources said.

The MFIs were allegedly charging interest rates of over 30 per cent, which was along with their reported coercive recovery tactics.

As regard the loan recovery period, the RBI is likely to allow MFIs to recover their dues on a monthly basis.

However, the repayment tenure would be less than 12 months for loans below Rs. 15,000 and less than two years for loans above Rs. 15,000.

The RBI had constituted the Malegam panel to suggest steps for streamlining the micro finance sector which drew flak for overcharging and use of coercive methods to recover loans from small borrowers.

On repayment, it said, the borrowers should be given the option of weekly or fortnightly or monthly return of the loan.

About the regulations of MFIs, the Malegam Committee, suggested that it should be done by the National Bank for Agriculture and Rural Development in close coordination with the RBI.

At present RBI controls all profits for MFIs.