The government today said it is not mulling a regulator for microfinance institutions (MFIs), but wanted them to evolve a code for themselves, even as these lenders draw criticism over their exorbitant interest rates and coercive recovery methods.
At Economic Editors' Conference here, Finance Minister Pranab Mukherjee said he has suggested to the Andhra Pradesh government to address some stringent provisions of its recently promulgated ordinance to rein in MFIs.
"I am not currently thinking of appointing any regulator right now... As we expect there should be a code evolved by the institutions themselves where rate of interest are not abnormally high and there should not be a coercive mechanism to recover the money," Mukherjee said.
There have been speculations that Nabard could be appointed as regulator for MFIs, as they do not come under separate regulation as of now.
Industry chamber Assocham has asked the government to set up an effective regulating body and put a cap on the interest rates charged by MFIs.
"The confidence of the people in microfinance model of development has shaken by the practices of unscrupulous microfinance institutions functioning in the rural areas of the country," Assocham said.
Andhra Pradesh government recently promulgated an ordinance to check MFIs, after a number of suicides were reported in the state, allegedly due to strong-arm tactics of MFIs for recovery of loans.
The ordinance makes it mandatory for all MFIs in Andhra Pradesh to register with the district Registering Authority, the Project Director (PD) of District Rural Development Agency (DRDA) for rural areas and PD of MEMPA for urban areas.
Now, MFIs will have to specify the area and system of their operations, the rate of interest and recovery mechanism while registering with the Registering Authority.
The registering authority may at any time either suo moto or upon receipt of complaints by Self-Help Groups (SHGs) or the general public can cancel the registration of the MFI after assigning sufficient reasons.
The Finance Minister said, "In respect of the ordinance which the Andhra Pradesh government has issued...I had a talk with Chief Minister over phone and suggested certain corrections in the ordinance...To see that the harsh provisions are taken care of."
He said MFIs should ensure that the borrower is in a position to pay back the money and as such lending should be mainly directed towards the productive borrowing not so much towards consumption.
The RBI has also constituted a sub-committee to look into the functioning of MFIs.
