Kolkata, Feb 16 (IANS): Virtually turning down the demand by micro-finance institutions (MFIs) for removing the stipulated cap on their margins, the RBI Saturday said if it does away with the cap then bank loans to the sector may not be treated as priority-sector lending.

"If I remove this (margin) cap it will not be treated as priority-sector lending. That much only I know. If they (MFIs) are happy with it, we may examine that," said Reserve Bank of Indian (RBI) Deputy Governor K.C. Chakrabarty here.

He was talking to the reporters on the sidelines of a conference on micro-finance, organised by the Indian Chamber of Commerce.

While the RBI had last year imposed a 10 percent margin cap for large MFIs and 12 percent for others, the micro-finance industry has been seeking a removal of that cap.

The bank had stipulated the 10 percent margin for micro-finance institutions with a portfolio over Rs.100 crore and 12 percent cap for institutions with lower than Rs.100 crore portfolio.

Currently, the central bank treats all bank loans to micro-finance companies as priority-sector lending.

The deputy governor also turned down the sector's demand for removing the 26 percent cap on lending rate.

Chakrabarty urged the MFIs not to expand operations without understanding their 'limitations'.

"Do not scale up without understanding limitations. Develop yourselves only for local markets. And do not lend money for consumption purposes," he added.