Special Correspondent

Far-reaching decisions taken at Coordination Forum meeting

Loans to be recoveredon a monthly, instead of weekly, basis Reserve Bank convenes the meeting to review MFIs' workingMFIs asked to come up with action plan on their promises

HYDERABAD: In a move that may bring back smiles on the faces of lakhs of Self-Help Group (SHG) members, the micro finance institutions (MFIs), which have been in the thick of a controversy over their coercive methods of recovering loans, have by and large agreed in principle to reduce their diminishing rate of interest to 15 per cent.

While some of the major MFIs expressed willingness to adhere to the 15 per cent diminishing rate, some others opposed the move.

The CEO of one of the major MFIs is said to have maintained that the new rates would not be viable, and recorded his dissent.

Effective burden

The present practice adopted by several MFIs is to charge a flat rate of 15 per cent interest that resulted in an effective rate of 33 per cent interest per annum on declining balance.

But, along with the hidden charges, the effective burden on the borrower worked out to 50-60 per cent per annum.

The MFIs have also accepted the Government proposal to recover loans on a monthly, instead of weekly, basis and to re-work the existing loans accordingly, official sources said.

These far-reaching decisions were taken at the maiden meeting of the Coordination Forum convened by the Reserve Bank of India (RBI) to review the functioning of the micro finance institutions here on Thursday in the wake of a spate of suicides by borrowers following harassment by recovery agents.

Representatives of the State Government, RBI, State-Level Bankers Committee and MFIs attended it.

Firm stand

Forestalling possible attempts to rationalise the actions of MFIs in the name of encouraging private participation, the State Government took a clear and firm stand that it would not brook unethical lending practices.

Sources said Principal Secretary, Rural Development, K. Raju rejected concerns about the fate of Rs. 1,000-crore outstanding from borrowers by asking what would happen to the nationalised banks that had provided bank linkages to the tune of Rs. 2,000 crores.

Bankers promptly backed his contention and demanded a check on the MFIs' activities.

Isolated cases

Representatives of major MFIs lamented that the media and some Government officials were trying to malign them by highlighting isolated cases.

However, they reportedly admitted to highhanded behaviour in several cases to recover money from borrowers.

RBI officials, who played the role of a `referee', directed the MFIs to come up with an action plan to implement their promises on cutting interest rate and on re-working the present loans.

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