Paper

Of Interest Rates, Margin Caps & Poverty Lending: How the RBI Policy will Affect Access to Microcredit by Low Income Clients

Examining the impact of regulation on microcredit availability in India
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This paper examines the impact of recent microfinance regulation in India. It compares historical yield data from 16 of the largest MFIs in India with pricing and margin caps announced by the Reserve Bank of India (RBI) to determine the feasibility of MFI operations. It also examines income limit and maximum loan size criteria to determine their relevance for microcredit availability to various income segments.

The RBI has attempted to resolve the current crisis in Indian microfinance by defining limits on interest rates, margins, incomes of microcredit borrowers, loan size and various other business conduct issues. The study reveals that the combined yield on the loan portfolios of the 16 largest MFIs has been within the RBI’s specified interest cap and their combined performance has been within the margin. The paper recommends that the regulator should:

  • Allow relaxations of the pricing cap in certain situations;
  • Incentivize MFIs to work in under served areas;
  • Introduce different criteria for different poverty levels and income categories;
  • Develop specialist knowledge of microfinance.