Banks are worried that they might not be able to control microfinance institutions from charging high interest rates to borrowers. They should thus come up with a mechanism that would enable to put a check on the lending process of MFIs.

Banks have been directed by the finance ministry that MFIs whom they lend money should not lend at rates more than 24% to the final borrowers.

As a measure in accordance to the directive, some banks have put a clause while lending to MFIs which reads that they can't lend to borrowers at exorbitant rates. They have however not put a ceiling on the maximum amount at which MFIs can lend to customers.

"We will have to take an undertaking from MFIs that they will not charge more than 24%. But the better way of doing it would be RBI asking MFIs to disclose it on their balance sheet about the loan given above 24%," pointed out Corporation Bank CMD RN Pradeep.

"How this can be translated in reality is not known. What happens if MFIs lend more than 24%?" asked a CMD of another bank on condition of anonymity. "Secondly, banks are not the only source of funds for MFIs. So, technically they can still continue to charge higher rates to the final borrowers," he added.

RIS Sidhu, chief general manager of Punjab National Bank said that the idea to put a cap of 24% as the maximum rate beyond which MFIs cannot lend is a very positive step. "One, it will make banks more conscious and active on the asset side of lending in rural India and secondly, as PSU banks become more active in rural space, competition will drive down rates," he said.