Source: The Financial Express.
Original article available here.
MUMBAI, Jun 18 – Microfinance organisations working in remote parts of the country have got a competitor in the state-run bank, Nabard [National Bank for Agriculture and Rural Development], which would continue to fund its microfinance activities at 9 percent of interest rates. This is despite the fact that other microfinance organisations charging at rates that are high as 20-25 percent.
The apex agricultural finance institution is establishing a Microfinance Development and Equity Fund worth INR 200 crore (USD 46 million). “The idea was to provide loan from the fund to those NGOs that are working in remote areas as financial intermediaries on behalf of the institution,” said UC Sarangi, chairman, Nabard.
Moreover, the bank was waiting for the proposed bill on microfinance to become an act, which will empower it to keep a close vigil on the activities of microfinance organisations. On how Nabard was able to keep its interest rates as low as 9 percent Sarangi said, “It all depends on volume of business and extent of recovery. If recovery was very good, risk will obviously become less. Again, if recovery is good and volume of business is also very high, then you are able to meet your transaction cost and in the process risk gets reduced.”
Nabard links directly to the groups without involving any intermediary entity, said Sarangi. The microfinance organisations are charging interest rate of 20-25 percent, as they are working in such areas where the banks were yet to have their access. Secondly, these microfinance companies go to the remote areas and convince the people to take loans which is a daunting task involving risk.
“The microfinance organisations are also raising money from the market like we do, but have to pay high transactional costs which may be compelling them to charge high interest rates,”adds Sarangi.
Besides, with a view to check unhealthy trends in the sector the government has proposed a Microfinance Development & Regulation Bill in Parliament and Nabard will function as a regulator for this. “Then we will be able to regulate microfinance organisations’ activities and the rate of interest being charged by them, “ he added.
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