BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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MFIs are not allowed to source deposits from public
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Banks have the benefit of cheaper funds
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MFIs borrow bulk of their funds from banks
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MFIs borrow funds from banks at high cost and also their administrative expenses are more
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Detailed explanation-1: -Why are interest rates so high? The interest rates on microloans range from 20 percent to 35 percent (even after adjusting for inflation). MFIs are subject to significantly higher costs than commercial banks, because of lending and administrative costs (for example, identifying and screening clients).
Detailed explanation-2: -For example, the inclusion of risk premium in interest rate calculation for microfinance loans means that for a new borrower, the interest rate will be higher but for a repeat good borrower (who repaid loans on time), the interest rate will be lower.
Detailed explanation-3: -Why are interest rates for MFIs higher than banks? The rate of interest levied by Microfinance Institutions (MFIs) are higher as compared to those levied by banks as it is more expensive to process smaller loans as compared to loans offered by traditional banks.
Detailed explanation-4: -Banks charge borrowers a slightly higher interest rate than they pay depositors. The difference is their profit. Since banks compete with each other for both depositors and borrowers, interest rates remain within a narrow range of each other.
Detailed explanation-5: -These visits often combine education, healthcare and other financial services, adding to the human cost of each microloan. The expenses associated with operating an MFI is one of the reasons that microfinance interest rates often appear high in comparison to other loans.