Regulator clarifies microcredit rate

Microfinanciers will still enjoy a large profit although the government has put a cap on the interest rates in efforts to better regulate the sector, the regulator said yesterday.
The observation came at a meeting of Microcredit Regulatory Authority (MRA), the state-run regulator, with its Chairman Atiur Rahman in the chair.
The meeting was organised to give explanation about some areas of the recently circulated guidelines that took a number of decisions including on interest rates.
The MRA published the circular last week, setting the highest rate of interest at 27 percent, banning deductions at the time of issuing loans and making it mandatory to allow at least a 15-day grace period to repay the loans.
The circular puts a ban on deducting money from loans, at the time of issuance, in the name of savings, insurance, or any other categories.
Under the new directive, which comes into effect on July 1, 2011, the microlenders must pay at least 6 percent interest on mandatory weekly savings of borrowers, which must be announced in advance. The MRA also made it mandatory to allow at least 50 weeks of time for recovering the entire amount of general loans, which are issued for a period of one year.
MRA officials said there is a misunderstanding that microcredit operations could not be conducted by borrowing money from commercial banks at the current rates of interest.
The cost of fund is only 7 percent for microcredit sector, while it is 3-4 percent for the banking sector, they said.
Savings with the MFIs account for 30 percent of their total outstanding loans and they only pay a maximum of 5 percent of interest on the savings.
Besides, the MFIs are running with a huge surplus fund, which does not have actual cost. If bank loans are added with the money then the average cost of fund comes to 7 percent, which will give 20 percent margin (administration cost and profits) to them when 27 percent cap is implemented, the officials said.
Despite less surplus fund with the MFIs due to higher administrative or borrowing cost, they still run their business profitably, thanks to a 20 percent margin, they added.
The meeting also discussed the flat system in calculating the rate of interest and blamed it for creating confusions about the lending rates.
In the flat rate, the 15 percent interest rate becomes at least 30 percent, which is not clear to the borrowers, the officials said.
The MRA observation and explanation came after the microlenders claimed that the interest rate cap will hurt them.
Mosharraf Hossain, chairman of the Credit Development Forum, a network of 650 MFIs, said the local MFIs have high costs as many borrow from private banks at around 13 percent interest.
There are extra costs while operating in the remote, rural areas, he added.
"With 15 percent operating cost and 13 percent borrowing cost in most cases, it will be tough to run business at the cap," he said. "We also write off a huge amount of loans during natural disasters."
Around 1,200 microlenders -- only 540 registered with the MRA -- operate in Bangladesh, serving around 4 crore of the country's about 16 crore people.