Don’t cap microfinance lending rates

Should lending rates of microfinance institutions (MFIs) — often 28-36 % — be capped? Some folk think so. Officials in Andhra Pradesh once closed down MFIs for usury, but the RBI came to the rescue, declaring there could be no cap on lending rates. Banning MFIs would only drive poor people into more expensive loans from moneylenders. MFIs have provided finance to 20 million poor people, whom nationalised banks could not reach. The RBI itself has promoted microcredit by classifying bank loans to MFIs as priority sector loans. 
If the finance ministry insists on MFI curbs, the least bad solution may be a cap on dividends. If high profits are ploughed back into expansion, it benefits new borrowers. That’s not the case if high profits go out as high dividends. Capping MFI dividends at 12% for the next five years will be better than an interest cap of 24%. This will still discriminate against MFIs: Infosys, Tata and Ambani don’t even try to promote inclusive finance, yet face no dividend cap.