Lending institutions must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable

FPJ News Service mumbai

Microfinance sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices, according to M Rajeshwar Rao, deputy governor, Reserve Bank of India.

“Microfinance has placed itself as a promising avenue for providing formal financial services to the excluded sections of the population. While microfinance has played an important role in financial inclusion, there are some issues which need attention,” he said at an event in Mumbai last week.

The frequency of disruptions in the microfinance sector, he said, has increased of late. Incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided.

In this regard, regulated entities must also enhance their credit appraisal frameworks to prevent over-leveraging of borrowers. Additionally, they must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable. While the business model may be sound, the organisational structure and the incentive schemes framed to deliver the services may be flawed resulting in perverse outcomes for customers. This calls for an introspection around the models.

While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist. The lenders should look beyond the conventional “high-yielding business” tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities.