The Microcredit Regulatory Authority (MRA) yesterday published a guideline for microfinanciers — putting a cap on interest rates, banning deductions at the time of issuing loans, and making it mandatory to allow at least a 15-day gap between the dates of loan issuance and first repayment instalment.

Around 1,200 microfinance institutions (MFIs) of the country must introduce all changes by June 30 next year.

In a circular, the state-run central body to

monitor and supervise microfinance operations of non-government organisations said MFIs will not be able to charge more than 27 percent interest on loans.

The circular came as the authorities are trying to bring discipline in the largely unregulated sector which serves around 4 crore people.

It said MFIs will not be able to charge more than Tk 15 for loan application forms, client admission fee, passbooks, etc. However, they will be able to ask for stamps of Tk 50, instead of Tk 150, while issuing loans to microenterprises. The guideline puts a ban on deducting money from loans, at the time of issuance, in the name of savings, insurance, or any other category. Currently, many microlenders deduct at least 5 percent of loans under such categories.

Although, at least a 15-day gap between the dates of issuing Ioans and first repayment instalments has been made mandatory, negotiations between lenders and borrowers, for a longer gap, have been allowed. Currently, borrowers usually start to repay a week after loan issuance.

MRA also made it mandatory to allow at least 50 weeks time for recovering entire amounts of general loans which are issued for a period of one year.

If any repayment instalment date coincides with a government holiday, borrowers will repay the dues on the next instalment date along with the current instalment.

Microlenders must pay at least 6 percent interest on mandatory weekly savings of borrowers, which must be announced in advance.

The lenders must calculate rates of interest on loans in declining balance method, in place of the existing flat rate method.

The regulator will also classify MFIs into three categories on the basis of the maximum rates of interest on loans, and their costs of fund.

Lenders, whose rates of interest on loans are no more than 10 percent higher than their costs of fund, will be in category A. Whose interest rates are 10 to 15 percent higher than the costs of fund, will be in category B. Category C will be those, whose rates of interest are more than 15 percent higher than the costs of fund.

Every MFI must have a specific pay structure, which must be sent to the authorities.

MRA also announced that the authorities will provide various incentives to MFIs that will take steps to cut loan interest rates.

In 2009, Microfinance Transparency, a US-based agency, found that the effective rates of interest in Bangladesh are between 18.75 percent and 51.68 percent.

Effective interest rates charged by about 75 percent MFIs are between 31 percent and 40 percent, while more than 40 percent of them charge 4.5 percent, the agency said.

An MRA study however found the minimum rate of effective interest at 24 percent and the maximum at 41 percent, if payments on savings and insurance made during loan commissioning, are not taken into account.

The minimum rate stands at 22 percent and the maximum at 85 percent if the deductions are considered, the study found.