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Updated: November 27, 2012 23:20 IST

Have a code of conduct, FM tells MFIs

Special Correspondent
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P. Chidambaram
P. Chidambaram

Asking micro-finance institutions (MFIs) to have a code of conduct and follow ‘respectful’ methods for loan recovery, Finance Minister P. Chidambaram, on Tuesday, expressed hope that the proposed Micro Finance Institutions (Development and Regulation) Bill, 2012, now under scrutiny by a Parliamentary Standing Committee, would provide adequate legislative framework for the sector’s regulation and development.

In his inaugural address at the annual ‘Microfinance India Summit’ here, Mr. Chidambaram said: “We are hopeful that the Bill will be cleared by the Standing Committee, and then brought to Parliament for passage…Once the Bill is passed, I hope that it will provide an adequate legislative framework for the entire gamut of micro-finance services.”

The Bill, drafted in the wake of difficulties faced by borrowers of micro-finance loans in Andhra Pradesh and other States, seeks to empower the Reserve Bank of India (RBI) to regulate the MFIs by way of compulsory registration with it and fix interest rate ceilings on loans to be provided by such lenders.

Highlighting the challenges that the MFIs face while playing an important role in financial inclusion, Mr. Chidambaram said “responsible financing by way of transparency, interest rate rationalisation, and respectful recovery procedure must be followed by microfinance institutions”

With the microfinance business of extending small loans at high rates of interest to the poor — who have no access to conventional borrowing mechanism — coming under severe scrutiny following the Andhra Government legislation, the Finance Minister said: “I will request the microfinance sector to adapt itself to the expectation of public at large, especially with regard to their code of conduct.”

At the same time, Mr. Chidambaram also asked the MFIs to verify data on the borrowers’ credentials with credit bureau so as to avoid multiple borrowing or over-indebtedness. Since Andhra Pradesh accounts for almost 50 per cent of the entire microfinancing business in the country and the State also witnessed a number of suicides by borrowers, allegedly owing to high interest rates charged by MFIs, the relevant legislation is aimed at strict monitoring of the industry and its functioning.

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