Mumbai, Mar 13 (KNN) The Reserve Bank of India (RBI) has said that the  loans given by banks to microfinance institutions (MFIs) can get the “priority sector loan” tag only if MFIs fulfil criteria relating to lending rate and margin cap.

According to the RBI, it has been decided that banks have to ensure MFIs (microfinance institutions) comply with the cap on individual loans and margin cap in order to be eligible to classify the loans under priority sector.

“Cap on individual loans - The average Base Rate of five largest commercial banks by assets multiplied by 2.75 per annum or cost of funds plus margin cap, whichever is less. The average of the Base Rate shall be advised by Reserve Bank of India,” said RBI.

“Margin cap: Further, with effect from April 1, 2014, the margin cap shall not exceed 10 per cent for MFIs having loan portfolio exceeding Rs.100 crore and 12 per cent for others, as against 12 per cent for all hitherto,” it added.

According to RBI’S Master Circular - Priority Sector Lending-Targets and Classification issued on July 01, 2013, “The banks have to ensure that MFIs comply with the following caps on margin and interest rate as also other ‘pricing guidelines’, to be eligible to classify these loans as priority sector loans.

“Margin cap at 12 per cent for all MFIs. The interest cost is to be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets,” it said.

Further, it added that, “Interest cap on individual loans at 26 per cent per annum for all MFIs to be calculated on a reducing balance basis.” (KNN/SD)