The government today said it is considering establishing a regulatory framework to deal with concerns relating to the micro finance sector, which has been under attack for charging exorbitant interest rates.

“There is a need for proper regulatory framework for micro finance institutions (MFIs) for protecting interest of small borrowers,” Mr Shashi Kant Sharma, Secretary, Department of Financial Services, said at a FICCI event here.

He said the government is considering “establishing the framework to deal with the concerns of micro finance institutions (MFIs)”.

Mr Sharma added that strong and effective regulation of the sector is necessary to put an end to illegal practices in the sector.

“Sudden and rapid growth of MFIs has given rise to lending malpractices by some MFIs,” he said at the national conference on micro finance organised by FICCI here.

Terming micro finance as an important plank in the government’s agenda for financial inclusion, he said the sector need to be put on the path of providing inclusive growth in society.

The MFI sector had come under controversy in recent times with charges being made against many players that they levy exorbitant interest on farmers and other poor sections.

Micro finance — the business of doling out small loans at high interest rates to poor people — has come under intense regulatory scrutiny in the wake of an ordinance passed by the Andhra Pradesh government in October last year.

The Ordinance, now passed into Act, came in after suicide by farmers allegedly due to inability to repay debt at high interest rates charged by MFIs were reported in the state.

Also there were allegations that MFIs were using strong-arm tactics to recover loans. With such allegations, the Reserve Bank of India formed the Malegam Committee to look into the health of the MFI sector in India.

The Committee, which submitted its report in January, recommended creation of a separate category for Non-Banking Financial Companies (NBFCs) operating in the MFI sector and capping interest rates at 24 per cent.

Speaking during the occasion, the FICCI Director General, Mr Rajiv Kumar said that MFIs need to diversify and provide access to financial services other than credit such as savings and insurance.

Mr Kumar suggested creation of forward and backward market linkages for MFIs to help them in reducing risks on loans to clients as also encourage rural entrepreneurship.

Related Topics
comment COMMENT NOW