<p>"The business model of microfinance institutions is faulty. They must revisit the model to support the income earning ability of the borrower," Prime Minister's Economic Advisory Council chairman C Rangarajan said at an event organised here by Skoch Consultancy.<br /><br />The MFI sector has come under much scrutiny, with the Andhra Pradesh state government passing an Ordinance in November to check them from charging high rates and using allegedly coercive loan recovery methods, believed to be behind a spate of suicides by borrowers in the state.<br /><br />The state government's move is believed to have hurt the operations and profitability of MFIs. Most microcredit firms lend money through Self help groups (SHG) or women's groups and reach out to borrowers. Interest rates charged by these MFIs usually go up to 36 per cent, mostly due to the cost of administering millions of such loans in remote areas.<br /><br />As such, most of the MFIs are believed to be turning into 'for profit' entities, rather than promoting the social cause of financial inclusion. Rangarajan said multiple lending done by MFIs is inconsistent with the very repayment capacity of borrower.<br /><br />He said MFIs have been indulging in multiple lending and large parts of the loans are given for consumption purposes and this model of business has landed them in trouble.<br /><br />"Income earning capacity must be criteria for granting loans... The provision of credit for consumption must be a small part of the total loan," Rangarajan said. Microfinance business aims at doling out small loans at high interest rates to poor people, who are unable to access conventional lending instruments.<br /><br />Of late, it has come under intense regulatory and government scrutiny, including the Andhra Pradesh ordinance that seeks to tighten screws on the industry, which has been blamed for a spate of suicides from borrowers in the state.</p>
<p>"The business model of microfinance institutions is faulty. They must revisit the model to support the income earning ability of the borrower," Prime Minister's Economic Advisory Council chairman C Rangarajan said at an event organised here by Skoch Consultancy.<br /><br />The MFI sector has come under much scrutiny, with the Andhra Pradesh state government passing an Ordinance in November to check them from charging high rates and using allegedly coercive loan recovery methods, believed to be behind a spate of suicides by borrowers in the state.<br /><br />The state government's move is believed to have hurt the operations and profitability of MFIs. Most microcredit firms lend money through Self help groups (SHG) or women's groups and reach out to borrowers. Interest rates charged by these MFIs usually go up to 36 per cent, mostly due to the cost of administering millions of such loans in remote areas.<br /><br />As such, most of the MFIs are believed to be turning into 'for profit' entities, rather than promoting the social cause of financial inclusion. Rangarajan said multiple lending done by MFIs is inconsistent with the very repayment capacity of borrower.<br /><br />He said MFIs have been indulging in multiple lending and large parts of the loans are given for consumption purposes and this model of business has landed them in trouble.<br /><br />"Income earning capacity must be criteria for granting loans... The provision of credit for consumption must be a small part of the total loan," Rangarajan said. Microfinance business aims at doling out small loans at high interest rates to poor people, who are unable to access conventional lending instruments.<br /><br />Of late, it has come under intense regulatory and government scrutiny, including the Andhra Pradesh ordinance that seeks to tighten screws on the industry, which has been blamed for a spate of suicides from borrowers in the state.</p>