Microfinance rates soon a click away

To bring in transparency the interest rates charged by various microfinance institutions, who lend to rural and urban poor, shall be available online for all to access.

Microfinance Institutions Network (MFIN), a self regulatory body, has asked data providing website mftransparency.org to put up interest rates charged by microfinance institutions in India. This is expected to happen in the next few months.

Apart from roping in this website, the MFIN has also collaborated with National Council of Applied Economic Research (NCAER) to provide a comparative structure of interest rates from various sources available to a rural or urban poor.

“NCAER will be compiling rates available to borrowers from various sources such as microfinance institutions, money lenders, banks others. This will not happen immediately, it will take time,” said Vijay Mahajan, president of newly-formed MFIN and chairman Basix Group, a non-banking finance company (NBFC) involved in microfinance activities in the country.

“To bring in more transparency, it has been decided to present interest rates charged by all microfinance institutions by product, by region, on www.mftransparency.org. The rates would be converted into annual percentage returns to avoid confusion. This will make the interest rates fully transparent,” said Mahajan.

Mentioning the interest in annualised form is essential as there are different ways in which interest can be referred to and calculated. Some banks and NBFCs charge a flat rate of interest, where one has to pay a fixed percentage as interest on the entire principle, month after month, while some reduce the portion of the principal paid back and then charge the interest in a reducing balance method.

Interest rate charged by microfinance institutions ranges upwards of 24% and is also described as 12-18% flat rate of interest. The costs is higher that that available to people through regular banking channels as the cost of borrowing money from a bank and then providing the same to poor in inaccessible regions is expensive. But when compared with 150% or above charged by money lenders in most regions, the cost is better off.

Elaborating on the cost of reaching to the poor, microfinance entities say, “Typically our borrowing costs for funds from banks are 11-14%, we don’t get any subsidy. We have very low overdues or non-performing assets (NPAs) that account for 1%. About 8-10% is the transaction costs, which includes staff salaries and transportation and other operational expenses. We must then make at least 2% to maintain the RBI capital adequacy, which has increased from 10% to 12% to 15% now.”

MFTranspaprency.org is a website launched in 2008 that presents information on credit products and their prices in “a clear and consistent fashion, allowing all microfinance stakeholders to work with a full understanding of the costs paid by clients.”

It has been serving 294 microfinance institutions and banks serving around 81million clients globally. About the methodology adopted, MFTransparency says on its website, “All operational rules, calculations, and data sources are made public. MFTransparency also operates on the principle of reporting solely objective and verifiable information. The website simply discloses the repayment schedules for each product that MFIs offer and calculates the prices of those products in Annual Percentage Rate (APR) and Effective Interest Rate (EIR) terms. Additionally, the pricing information of each product will be presented in graphical forms that demonstrate the relationship between loan size and interest rate in that specific market."