Microfinance institutions will not be able to charge more than 27 percent on their loans as the regulator is set to alter microlending practices.
Officials of the Microcredit Regulatory Authority (MRA) have confirmed the changes, which will be published in a circular soon.
The changes will establish a uniform interest rate for microfinance institutions, which boast of around three crore borrowers.
Under the changes, the MFIs will not be able to deduct money from the loans issued against the borrowers. Currently, many microlenders deduct at least 5 percent of the loans in the name of savings.
The MRA officials said the grace period between the issuance of a loan and the repayment of first instalment will be at least 15 days. Currently, the borrowers start to repay the following week after receiving a loan.
The number of instalments will not be more than 50, they said. The MFIs have to pay at least 6 percent interest on the savings of borrowers.
Also, the MFIs will not be able to charge more than Tk 15 for loan processing and passbooks.
The institutions will be able to use stamp of Tk 50, instead of Tk 150, while issuing loans to a microenterprise.
The officials said the latest changes might benefit the MFIs who receive funds from Palli Karma-Sahayak Foundation (PKSF), a state-run lending agency.
Around 193 partner organisations of PKSF receive loans at 4.5-7 percent interest, while many MFIs borrow from commercial banks at 13 percent.
The regulator will request the PKSF to fund the small MFIs, a senior MRA official said, hinting at further cuts in rates that now vary from 30 percent to 60 percent.
The MRA will also repeal the flat rate system, said the official, adding that the MFIs will have to introduce the changes by June next year.
However, leading MFIs, who had been urging a minimum flat rate of 15 percent, said the planned interest rates would not be financially viable for most microlenders.
“The 13.5 percent flat rate or 27 percent effective rate will not be viable,” said Mosharrof Hossain, finance director of BURO Bangladesh, a leading microlender.
He called for a review and said their operations should not be compared with those of banks, as the MFIs deal with small loans and operate in remote areas at high operating costs.
Hossain, also the chairman of Credit Development Forum, a network of MFIs, welcomed the decision on setting 6 percent interest on savings of the borrowers with the MFIs.
But he disputed the regulator's plan on deduction of money in the name of savings during loan issuance, which, he said, works in favour of the borrowers.
Shameran Abed, programme manager (microfinance) of Brac, said their margin will be almost nothing if the effective interest rate is set at 27 percent.
“We will face problems in the event of any shock,” he said. “It may not be possible to run on that rate in the impoverished areas.”
In 2009, Microfinance Transparency, a US-based agency, found the effective rate of interest in Bangladesh at 18.75 percent to 51.68 percent.
About 75 percent MFIs charge effective interest rates between 31 percent and 40 percent, while 4.5 percent charge over 40 percent, the agency said. Around 800 MFIs operate in Bangladesh.