PM panel for micro finance regulator

Sector under spotlight for charging high interest rates

“We feel that efforts be made to evolve a regulatory mechanism for the micro finance sector,” Chairman C Rangarajan told reporters here.

The MFIs are increasingly coming on the radar of the government for charging very high interest rate on loans sanctioned by them and resorting to coercive tactics for recovery. Poorer sections of society—especially poor artisans, farmers and small time businessman—avail loans from MFIs.   

The government, as part of ongoing exercise to push forward financial inclusion is encouraging the growth of MFIs. But some of the MFIs have come under severe criticism for charging very high rate of interest thus causing hardships to borrowers, most of whom are poor. Some of the MFIs are reportedly charging interest rate in the range of 26 to 34 per cent per annum.

Some of the MFIs are reported to have resorted to strong-arm methods to recover loans thus causing hardships to small time borrowers. There are media reports about coercive methods leading to death of borrowers in some cases in Andhra Pradesh.

In the face of hardships faced by small time borrowers from the MFIs the Andhra Pradesh government is contemplating to put a cap on the interest rates charged by the microfinance companies through a new law.

Through an Ordinance promulgated last month, the Andhra Pradesh government has asked the state MFIs to furnish details of the interest rates being charged by them and their areas of operations.

Calling upon the MFIs to reform their business practices Rangarajan said “formal regulatory systems will have to be put in place. Though one feels that significant expansion of financial inclusion can occur from the banking sector, there is also a role for MFIs.”

“The reason why there is a strong need for reform in the MFI sector, is that MFIs are already linked to the banking system. But if this link is to be strengthened the MFIs need to modify some of their lending practices,” Rangarajan said.

In view of growing criticism over the style of functioning of the  MFIs, the Reserve Bank of India last month decided to study the issues and concerns in microfinance sector.  The apex bank has set up a sub-committee of the Central Board of Directors of the RBI to study the issues and concerns in this sector, including ways and means of making interest rates charged by them reasonable. The committee is expected to submit its report in three months time.