“Lenders should not throw caution to the winds while chasing high asset growth and returns,” Rao said.
“Any lapse through adversarial actions of MFIs can undo the tremendous progress achieved over the decades and the sector may be unable to do so,” Rao said. Sa-Dhan National Conference On ‘Reviving Financial Inclusion’.
He said lenders need to remain true to the roots and origins of microfinance and that it “should not be sacrificed at the altar of bottom-line growth”. “Prioritizing profitability at the expense of social and welfare goals of microfinance may not be an optimal outcome,” he said, underlining the need to achieve financial stability through profit.
The sector has often been criticized for high interest rates disproportionate to lenders’ financing and operating costs, debt-trap-like situations to borrowers and harsh recovery methods that create distress loans.
The microfinance pyramid is a way to provide collateral-free loans to the bottom line of borrowers, especially women, while lenders typically charge an interest rate of around 20-24%.
“These are issues that require significant introspection and must be addressed by lenders to prevent recurrence of crisis episodes,” Rao said.
The regulator recently unveiled an advisory document on microfinance regulation to address over-indebtedness of borrowers and curb the menace of multiple lending.
In the proposed framework, the RBI suggested that the regulations focus on the repayment capacity of the borrowers rather than considering only the debtor or indebtedness. NBFC-MFI in solitude. RBI has also proposed to remove the regulatory cap on interest rate which is now applicable only to NBFC-MFIs.
“The prescription of a ceiling on the lending rate for NBFC-MFIs has had an unintended consequence which does not allow competition to play out. There is concern that the current guidelines, prescribing interest rate ceiling only for NBFC-MFIs, are effectively acting as a benchmark for other lenders as well. It is generally observed that the interest rates of other lenders in the microfinance segment also hover around this range despite the comparatively low cost of funds.
Many high street banks, especially those in the private sector, offer micro-loans at rates up to 24%, despite their significantly lower cost of funds.
The Reserve Bank of India expects that the removal of the interest rate cap will bring the market mechanism into action and bring down lending rates.
However, NBFC-MFIs, which are currently facing a squeeze in their interest rate margins due to higher credit costs after the pandemic, could do just the opposite.