MFIs cannot collect interest more than the principal

The accumulated interest collected by microfinance institutions (MFIs) on loans shall not exceed the principal amount, according to the much-awaited ordinance promulgated by Governor E.S.L. Narasimhan here on Friday to put a check on their activities.

However, the interest rate chargeable by the MFIs finds no mention in the ordinance as the government is of the view that this falls under the purview of the Reserve Bank of India (RBI), according to Minister for Rural Development Vatti Vasant Kumar.

Describing the ordinance as ‘a Dasara gift' to the 1.09 crore members of the 9.5 lakh self-help groups of women in the State, the Minister told presspersons that it was aimed at imposing several restrictions on the operations of the MFIs. The ordinance, which was approved by the Cabinet at a special meeting earlier this week, will be applicable to all the MFIs and all their loans -- past, present and future.

Mr. Vasant Kumar claimed that the ordinance had laid down such conditions to make sure the interest rates charged by the MFIs came down drastically.

He said that collection of interest beyond the principal amount by “coercion” and other means would render the MFIs liable for punishment with imprisonment up to three years or a fine up to Rs.1 lakh or both.

The Minister said SHGs were expected to get further relief as the soft loans being arranged to them from banks under debt swap scheme, to clear the MFI loans, would be charged only “pavala vaddi” (3 per cent). The government would bear 10 per cent out of the 13 per cent interest charged by the banks on these loans. The ordinance made it mandatory for MFIs to issue ID cards to all its employees. Only those possessing ID cards could be deputed for recovery of loans. They must not visit houses of the debtors, but contact the SHG members at the gram panchayat office in the presence of a panchayat officer or sarpanch.

Registration

The MFIs would have to register themselves within 30 days from now, with the registration authority -- project directors of District Rural Development Agency in rural areas and Mission for Eliminating Poverty in Municipal Areas (MEPMA) in urban areas.

Otherwise, they would not be permitted to undertake lending activity.