Private banks recently asked the Reserve Bank of India (RBI) to lift the interest rate cap on microloans under INR 2 lakh (USD4,265). Currently, private banks cannot charge more than their benchmark prime lending rates, which range from 11 percent to 16 percent, on these loan amounts. The banks argue that lifting the cap would allow them to go after unbanked segments of the population and provide competition against the high rates charged by microfinance institutions (MFIs) and money lenders. MFIs and moneylenders typically charge between thirty percent and thirty-five percent on these types of loans. Also given their distribution network, private banks argue that they can contribute to the growth of the microfinance sector. Mr. M. V. Nair, Chairman of the Indian Banks Association (IBA), declined to comment on banks’ interest rate proposal to RBI, however, he commented that, “Any distortion of the interest rate in the marketplace gives rise to malpractice. As long as banks extend credit at an appropriate price which the market can bear, extending microcredit will help achieve finance inclusion.”
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