Regulator keeps interest rate cap intact, relaxes repayment rules

FE Report (June 14, 2011)

The micro-finance regulator has kept interest rate ceiling on small-loans intact, but eased rules on grace-period and repayment installments in the face of protests from the industry.

The Microcredit Regulatory Authority said the lending rate cap would remain at 27 per cent when it becomes mandatory for the country's 568 licensed for-profit small lenders from July 1.

But in the face of widespread protests from the micro-lenders, the authority said the grace period for repayment of first installment would be reduced to 15 days from 21 days as was prescribed earlier.

And a borrower must pay back his loans in 46 installments, down from 50 installments set by the MRA in November last year as part of the first government move to streamline the booming sector.

MRA director Sazzad Hossain said the relaxed rules along 27 per cent interest rate cap would be enforced from July 1 this year, with all but one micro-lenders opposing the move.

"We told them that there is no way we can raise the interest rate cap. The 27 per cent cap is logical and it won't affect business of any micro-lender," Mr. Hossain said.

The regulator, however, eased grace period and cut the number of repayment installments in an effort to avert credit defaults and help lenders cope with emergencies, especially during extended bank or government holidays, he said.

"So far all but one micro-lenders have agreed to the latest changes. An order to this effect has been issued this week," he said.

In April, the micro-lenders under the banner of Credit Development Forum and several international charities have protested the cap, saying it would drive many to bankruptcies and high number defaults.

They said the move to streamline the sector could adversely affect rural areas --- home to the majority of the country's 21 million borrowers who last year borrowed some Tk300 billion from these lenders.

In a letter, they argued that the planned extension of grace-period and repayment installments would also cause "indiscipline" in the credit repayment regime.

Mosharraf Hossain, the head of CDF, said micro-lenders who rely on commercial banks for their fund could face lending cap difficult to maintain due to recent hike in interest rates in the banking system.

Mr. Hossain ruled out the possibility of adverse fallout of the cap, saying the MRA has done comprehensive home-work before fixing the rate.

"I can tell you none will be affected. Rather, it'll bring discipline to the sector," he said.

The MRA formed four years back announced the rate ceiling in November last year in an attempt to regulate the micro-lending industry, which has become a financial behemoth in the country.

But despite making astounding profits, some of these lenders have been charging more than 40 per cent interest rate for their small loans, meant to help rural poor and create jobs.

Among the Bangladeshi small lenders, Grameen Bank charges the lowest -- 20 per cent -- interest rate. But the bank isn't technically under the MRA. It's regulated by a separate law.