Micro lenders told to follow declining-balance method
Tuesday, 16 November 2010
FE Report
Microcredit Regulatory Authority (MRA) has asked micro lenders to calculate interest rate using 'declining-balance' method, one kind of loan amortisation technique, instead of current practice of 'so-called' flat rate method.
MRA has already fixed maximum limit of interest rate to be charged on micro loans at 27 per cent also suggesting average number of payments to 50, a press release from MRA said.
The authority observed that banking sector all over the world including Bangladesh uses declining-balance while micro finance institutions (MFIs) use flat rate method.
MRA said that calculating interest using flat rate creates ambiguity and it charges almost double interest rate of what the MFIs disclose to their borrowers.
The press release explained that the borrower should pay less interest with every instance of payment and thus will pay the lowest interest at his/her 50th payment. "But MFIs in Bangladesh charge flat interest in all payments charging more for later payments, which just makes the interest rate double," the release said.
Actual interest rate for micro-credit also depends on the grace period, first obligatory payment and number of payments. The authority also categorically asked the MFIs to be 'sympathetic' to borrowers. "The borrowers can pay the loan back only if they earn more than the interest being charged and only then, the purpose of micro-credit will be fulfilled", MRA said.
Rejecting MFIs' claim of high cost of fund, MRA said, "Cost of fund for MFIs is 7 per cent and they can enjoy a return of 20 per cent". At present, costs of fund for banks are 3 to 4 per cent. "Even MFIs taking loan from banks can survive smoothly with the interest rate framework of 27 per cent."
Microcredit Regulatory Authority (MRA) has asked micro lenders to calculate interest rate using 'declining-balance' method, one kind of loan amortisation technique, instead of current practice of 'so-called' flat rate method.
MRA has already fixed maximum limit of interest rate to be charged on micro loans at 27 per cent also suggesting average number of payments to 50, a press release from MRA said.
The authority observed that banking sector all over the world including Bangladesh uses declining-balance while micro finance institutions (MFIs) use flat rate method.
MRA said that calculating interest using flat rate creates ambiguity and it charges almost double interest rate of what the MFIs disclose to their borrowers.
The press release explained that the borrower should pay less interest with every instance of payment and thus will pay the lowest interest at his/her 50th payment. "But MFIs in Bangladesh charge flat interest in all payments charging more for later payments, which just makes the interest rate double," the release said.
Actual interest rate for micro-credit also depends on the grace period, first obligatory payment and number of payments. The authority also categorically asked the MFIs to be 'sympathetic' to borrowers. "The borrowers can pay the loan back only if they earn more than the interest being charged and only then, the purpose of micro-credit will be fulfilled", MRA said.
Rejecting MFIs' claim of high cost of fund, MRA said, "Cost of fund for MFIs is 7 per cent and they can enjoy a return of 20 per cent". At present, costs of fund for banks are 3 to 4 per cent. "Even MFIs taking loan from banks can survive smoothly with the interest rate framework of 27 per cent."