Disagreeing with the views of the Left parties and certain members of the Standing Committee of Parliament, the finance ministry has opposed any cap on interest rates for small loans under the Micro Finance Bill.
The Bill, which was introduced in Parliament, is currently under consideration of the Standing Committee.
Although some members in the Standing Committee want to put a cap on the interest rate on micro-financing, we are not in its favour as it can kill the institution of micro-financing even before it takes off, a senior finance ministry official said.
He said the ministry wanted to bring in as many players to the sector as possible, in the hope that competition would bring down interest rate to a reasonable level for small borrowers.
According to estimates, there are over 800 micro-finance institutions operating in India in various forms trusts, societies, cooperatives and non-banking finance companies.
The Bill, which was introduced by Finance Minister P Chidambaram, seeks to regulate small micro-credit institutions through the National Bank for Agriculture and Rural Development (Nabard), requiring them to meet stringent accounting standards.
However, the Bill does not contain any provision regarding ceiling on interest rates that could be charged from the borrowers.
Another official source said due to differences among the members of the Standing Committee and opposition from the Left parties, the Bill could not get Parliamentary approval during the Budget session. However, it is expected to get the nod in the coming session, he added.
According to the source, the finance ministry had brought to the notice of the Standing Committee that at a time when money lenders and commission agents were charging as much as 50-300 per cent interest, it should not insist on putting any limit on interest rate.
Any cap on interest rates would discourage big players such as private and foreign banks to lend to micro-finance institutions. We are certain that with more competition, the interest rate would come down, now in the range of 24-30 per cent, said the finance ministry official.
Pointing out that interest rate was not a problem for small borrowers like village women enterprises and landless labourers, he said rates were higher because micro-finance institutions provided loans at the doorstep of borrowers.