What is a fair interest rate for microcredit?

Business Standard, 16th August 2006, has an article quoting a study by the Washington-based Consultative Group to Assist the Poor (CGAP) that even a 40% interest rate is helpful to the end customer.

Of course, the microfinance interest rates have to be seen in the backdrop of the prevailing bank interest rate in the country, credit card APRs and informal interest rates charges by village moneylenders etc.

In India, the personal loan (consumption loans) interest rates are currently between 14% - 24%. The credit card interest rates are upwards of 24% going all the way to 36% and more. Considering this, the microfinance interest rates in India are probably well below this - about 12% - 28%.

Quoting the BS article (which quotes the study):

According to the agency, attempts by governments to regulate this industry by capping the rate of interest in various countries have resulted in denial of access and withdrawal of players from offering these products and services thus forcing these very poor people to return to money lenders. There is no evidence of it actually having reduced the effective cost of financing for small borrowers.

The best way for governments and donors to lower interest rates without making microcredit unsustainable is to promote competition and innovation, both of which improve efficiency and lower prices, it says.