The Indian government is closer to placing a cap on interest rates for microfinance institutions. The bill will likely be put forth to Parliament by the end of the year and seeks to also prevent microfinance institutions from taking deposits. By PRASANTA SAHU

NEW DELHI – The Indian government plans to introduce a bill to regulate microfinance institutions that will seek to prevent them from charging very high interest rates and taking deposits, a senior finance ministry official said Friday.

The bill, which will be in line with a central bank-appointed panel’s recommendation, is likely to be placed before parliament this year.

Microlenders like sector leader SKS Microfinance Ltd. give loans as little as $20-$25 to small entrepreneurs and farmers in rural areas. They have often been accused of charging high interest rates and using overly aggressive measures to recover money from borrowers.

The issue gained political prominence after a string of borrower suicides.

The southern state of Andhra Pradesh, where SKS Microfinance and some other major microlenders are based, implemented a law during the October-December quarter to cap lending rates and prevent strong-arm recovery practices. Microlenders are facing severe repayment problems since then.

The Reserve Bank of India set up a committee late last year to suggest long-term and structural changes in the functioning of microfinance institutions. The panel recommended creating a separate category of non-banking finance company for microlenders as well as capping operating margins at between 10%-12% and interest rates charged by them at 24% and the central bank is expected decide on the suggestions by the end of April.

“There will be a cap on interest rates,” the finance ministry official said. But, “it is not yet decided whether interest cap will be both cap on margin and overall cap, or only an overall [interest rate] cap of 24%.”

The official said microfinance institutions won’t be allowed to raise deposits from the public.

They will treated as non-deposit taking non-bank finance companies and will regulated by the central bank, the official said. “The source of funds for microfinance should be banks and private equity.”

There may not be any need for provincial governments to regulate separately these microlenders in future, the official said.

Write to Prasanta Sahu at