India's central bank, the Reserve Bank of India (RBI) has said that it has removed 26 per cent cap on the interest rate that can be charged by a microfinance company to its borrowers.

The central bank has also prescribed a new method of determining the rate for the industry. The RBI said that MFIs can arrive at their lending rate by calculating their cost of funds and adding the prescribed margin. The new method will allow the companies to determine their interest rates.

MFI is allowed to charge interest rate equal to 2.75 times the average of the base rates of the top five commercial banks. The bank said that the MFI will have to accept the lower of the two rates. The new rules also states that the large MFI, registered as a non-banking finance company, will be allowed to have a margin of 10 per cent while the remaining can have margin of 12 per cent.

"The above instructions will come into effect from the quarter beginning April 1, 2014. The bank will announce the applicable average base rate on March 31, 2014, and every quarter end thereafter," the RBI said in a release on Friday.

Source: Top News