Chief Economic Adviser Kaushik Basu on Thursday said microfinance institutions (MFIs) charge high interest rates and need to be regulated, but cautioned against excessive legislation.
"MFI interest rates are high. We need legislation to regulate it (the MFI sector)," Basu said on Thursday.
The microfinance industry faced the heat of Andhra Pradesh state government after a series of suicide cases were reported in the state, which were allegedly caused by the coercive recovery tactics employed by these institutions.
"You have to regulate it, but also have to make sure that you do not regulate it out of existence," he added.
MFIs have been criticised for charging very high interest rates and using strong-arm tactics for loan recovery. MFIs say they extend loans to unbanked areas and so the cost associated with such loans could be as high as 34 per cent of the principal amount. They usually lend money to borrowers through women's groups in remote areas.
Last week, Finance Minister Pranab Mukherjee had said the Centre intends to regulate the sector, without strangulating it.
Following a spate of suicides in Andhra Pradesh, the state government passed an ordinance on October 15 making it mandatory for all MFIs to register their activities with the district Registering Authority. Furthermore, the MFIs were directed to increase the loan repayment period for self help groups (SHG) to 30 days, as against the earlier practice of 15 days.
This has impacted the collections of MFIs, as loan recovery activities were impacted and bank financing has also become more difficult to secure.
The government is in the process of finalising a draft Bill to ensure the development and orderly growth of the microfinance sector in rural and urban areas. The Bill would be introduced in Parliament after taking into account the views of the Reserve Bank and the recommendations of an RBI sub-committee.
Last month, the Reserve Bank appointed a committee under the chairmanship of YH Malegam to examine the state of the MFI sector. The committee will submit its report by January.
