Cap Interest Rates and Regulate MFIs - Associated Chamber of Commerce and Industry of India (ASSOCHAM)

Mumbai, Oct 27, 2010 (Washington Bangla Radio / pressreleasepoint) The Associated Chamber of Commerce and Industry of India (ASSOCHAM) has stated that the reputation of micro finance as an effective source of bridging financial access gap has severely been dented by the recent unfortunate turn of events in Andhra Pradesh and elsewhere and, therefore the government needs to set up an effective regulating body and put a cap on the interest rates charged by MFIs.

“The confidence of the people in microfinance model of development has shaken by the practices of unscrupulous microfinance institutions functioning in the rural areas of the country. The unreasonably higher interest rates charged by MFIs and their coercive practices have helped this sector to pos higher profits at the cost of the welfare of the helpless rural people that are yet to be financially included.

In fact, MFIs, in the absence of appropriate regulation and guidelines have been found pushing the vulnerable sections of the society into debt trap and thereby causing social, mental and physical trauma. The government needs to come out with an effective way out for this menace. Mainly, the presence of effective regulator and caps on the interest rates charged by MFIs are the need of the hour” the chamber said.

Assocham, in a note said, in India, the success and higher earning of profit have changed the motive of MFIs and nowadays they were viewed as a profit oriented institutions. These institutions presently, offering finances to their target client at a very high rate of interest (30-40 per cent). On the other hand, they borrow these funds from their financial resources at comparatively very low rate of about 10-13 per cent, (depending on the prime lending rates).

In fact these institutions were established to support the weaker section of the society through easy financing of relatively smaller loans of less than Rs. 50,000.

However, the high rate of interest charged by MFIs results in to the delayed repayment of the loan by the borrowers. Under these circumstances, rather offering more time for refund or settlement of loans, these institutions often found harassing the borrowers. Even the MFI’s alleged high-handed recovery methods that reported led to have suicides.

The trap in the form of lending to poors and subsequent mental and physical harassment by these institutions, in case of the delay in refund of the loan resultant suicides in rural areas requires attention of the controlling authority to regulate the unhealthy lending activity.

The micro financial has great potential to assist in the national goal of monetary inclusion as well as add depth to India’s financial market. There are two main delivery channels for microfinance services. The first one is SHG (Self Help Group) and other one is SHG Bank Linkage Channel (SBLC), both the channels have witnessed healthy growth over the last ten years.

The Microfinance programmes in India become the main contributor towards financial inclusion. According to the National Bank for Rural and Urban Development (NABARD) annual report at the end of FY10 MFI have covered about 8.6 crore poor households and It has maintained 61.21 lakh SHGs bank savings accounts of Rs.5,545.62 crore and 42.24 lakh SHGs clients with outstanding loan of Rs.22,679.84 crore.

According to the data, at the end of FY10, there were 581 MFIs with the bank credit of Rs 3,732.33 crore and 1,915 MFIs with the outstanding loan of Rs 5,009.09 crore, as compare to Rs. 2748.84 crore in FY09, recorded the growth rate of 82.22 per cent.

 - pressreleasepoint

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