RBI WARY OF LOANS TO "FOR- PROFIT" MICRO FINANCE COMPANIES

The Reserve Bank of India has raised questions over bank lending to "for-profit micro finance institutions", which then on-lend the money at extremely high rates. The central bank has encouraged banks to lend largely to non-profit institutions and not those that are hoping to generate profits. The issue of bank lending to MFIs has been raised for a long time now. The reason why rates could be high is that MFIs would typically borrow Rs. 20 crore from a bank and on-lend them through
20,000 loans of Rs. 10,000 each. These loans may carry higher NPA risk and very high administration cost. Bigger MFIs have brought down their average lending rates from around 30% to closer to 26%, where as some are charging as high as 36%-40%.