‘Margin should be adequate to cover the transaction cost and the risk element’.
After suggesting that microfinance institutions (MFIs) change their ‘flawed’ business model, C Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, today said MFIs’ interest rate margins should be capped.
“I suppose one approach is to fix the margins of MFIs so that the margin they enjoy is not really too high. The margin should be adequate to cover the transaction cost and the risk element,” he told media persons on the sidelines of the foundation day fete of skill-development firm, TalentSprint.
While refusing to specify the figure for such a cap, he said “that (number) depends on the rate at which they borrow and the rate at which they lend."
Further, to a query on the interest range suggested by the Andhra Pradesh Government in its report to the Malegam Committee, appointed by the Reserve Bank of India to study the microfinance sector, he said the report needs to be examined by the committee. Earlier, he had asserted that the business model adopted by MFIs that are facing rough weather in Andhra Pradesh, should undergo a change.
“The whole idea of encouraging microfinance is to encourage credit for income generating activities,” Rangarajan had said.
“One of the problems that have surfaced recently is that they (MFIs) have been indulging in multiple lending and a large parts of the loans are given for consumption purposes. This is the model that will land them in trouble,” he had said.
On the issue of a need for a separate regulator for MFIs, Rangarajan said the report of the Malegam committee needs to be taken into consideration before a decision is taken in this regard.
“We need to wait for the report. The Non-Banking Finance Companies (NBFCs) are theoretically under the regulation of RBI. So far, they looked at the liability side of the NBFCs. Now they should look at the assets side also and think what kind of regulation can be thought out,” Rangarajan said.
On inflation, he said that by the end of December it (inflation) could come down to 6.5 per cent and will further come down to 5.5 per cent by March 2011.
