India plans law to control microfinance lending rates

NEW DELHI: India's government plans legislation to crack down on microfinance institutions to stop them charging very high interest rates, a finance ministry official says.

Legislation, sparked by a a string of suicides by impoverished borrowers, is expected to come before lawmakers this year, the finance ministry official said late Friday, asking not to be named.

"There will be a cap on interest rates," the official said.

Micro-lenders, such as India's largest SKS Microfinance, give loans as low as $20 to small business and farmers but have been accused of charging excessively high rates and using aggressive tactics to recover money from borrowers.

The new legislation is expected to be modelled on recommendations of a central bank panel which said its proposed changes would bring a "new dawn" to the troubled sector.

The bank panel proposed capping interest rates at 24 percent.

It also said micro-lenders should remain eligible for "priority sector lending" in which they would enjoy "privileged access to commercial bank credit" that has fuelled the industry's explosive growth.

"The source of funds for microfinance should be banks and private equity," the finance official said.

The microfinance sector was until recently hailed as a saviour of India's poor for providing to millions of borrowers often small entrepreneurs unable to get credit from mainstream banks.

But the micro-financiers' surging profits, accusations of coercion and interest charges that can exceed 30 percent have led to mounting controversy with some critics accusing them of becoming grasping moneylenders.

India's southern state of Andhra Pradesh, where SKS Microfinance and many other major micro-lenders are headquartered, passed legislation last year to cap lending rates and prevent strong-arm recovery practices.

Andhra Pradesh, which accounts for $2.5 billion of micro-loans outstanding out of $7 billion nationwide, reined in micro-financiers after claims that high rates and arm-twisting debt collectors had caused 85 suicides.

The sector admits there are "rogue" elements that must be checked but it says it has contributed hugely to poverty alleviation and says its steep rates reflect the cost of administering loans in India's vast hinterland.