With microfinance institutions (MFIs) suffering loss of business particularly in Andhra Pradesh, the Centre today said it does not intend to strangulate the microfinance sector but regulate it.
"My idea is not to strangulate them (MFIs), but to regulate it so that the interest that they charge is not exorbitant and the method of realisation, under no circumstances, should be quick," Finance Minister Pranab Mukherjee said at the HT Leadership Summit here.
The microfinance industry has been under pressure after Andhra Pradesh state government introduced an Ordinance last month to regulate its lending practices. MFIs have been criticised for charging very high interest rates and using strong arm tactics for loan recovery.
MFIs say they extend loans to unbanked areas and so the cost associated to it runs up to as high as 34 per cent. They usually lend money to borrowers through women groups in remote areas.
"The rate of interest should be moderate. Banks are also being instructed to provide them (MFIs) with necessary guidelines (and check) if those guidelines are complied to.
"I would not like to strangulate the system, because it is not possible for the banks to reach large number of people through regular banking services," Mukherjee said.
Earlier, the microfinance institution network had said the companies would cut interest rates to 24 per cent eventually.
Mukherjee said that in certain cases the interest rates charged by MFIs varied between 30-35 per cent. "It (interest rate) cannot be uniform, so some sort of flexibility will have to allowed," he added.
Last month, the Reserve Bank appointed a committee to examine the state of the MFI sector under the chairmanship of Y H Malegam. The committee would submit its report by January.
"After obtaining these (the RBI committee) reports, I will take appropriate measures in consultation with the RBI," Mukherjee said.
Following a spate of suicides in AP, on October 15 the state government came up with the ordinance making it mandatory for all MFIs to register with the district Registering Authority. Also, the MFIs should increase the loan repayment period for self help groups (SHG) to 30 days, as against the earlier practice of 15 days.
This has impacted the collections of MFIs; the country's only listed microfinance company SKS yesterday said that its collection for November had come down and in future could affect its profitability.
The Finance Minister said he had analysed the ordinance and given some suggestions to the Andhra Pradesh government. He exuded confidence that the suggestions would be carried out when an Act replaces the ordinance.
