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Updated: August 29, 2012 22:34 IST

Microfinance institutions must be responsible lenders: Rangarajan

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C. Rangarajan. File Photo: P.V. Sivakumar
C. Rangarajan. File Photo: P.V. Sivakumar

Faulting microfinance institutions (MFIs) for adopting strong-arm tactics, Prime Minister’s Economic Advisory Council Chairman C. Rangarajan, on Wednesday, said MFIs must modify their business models and become responsible lenders.

Business models

“Microfinance institutions which were becoming an effective alternative to money lenders can recapture that position only if they modify their business models and become responsible lenders,” Dr. Rangarajan said at the Dainik Bhaskar Financial Inclusion Conclave.

Critical of the working of the MFI sector, he said “strong-arm tactics adopted in recovering loan repayments have evoked much resentment. Equally, the business models adopted by many of the large MFIs were wrong. Multiple loans to borrowers for non-productive activities are a self-defeating exercise.” The overall cost to borrowers must be maintained at a level that was consistent with the repaying capacity of the borrowers, he said, adding “loans must also be reoriented towards income earning activities”.

Limit on interest rates

The regulatory framework for the MFI sector, he said should prescribe a reasonable limit on interest rates and restrict multiple borrowing. “... A network of strong microfinance institutions can play significant role in achieving financial inclusion.”

Dr. Rangarajan also made a case for introduction of new products and simplified procedures by banks to meet the needs of customers in rural areas.


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