RBI Deputy Governor M Rajeshwar Rao said that despite some moderation in interest rates in the recent quarters, the microfinance sector continues to suffer from harsh recovery practices, high interest rates, and the vicious cycle of indebtedness.
Speaking at an HSBC event, the Deputy Governor said that while microfinance has opened new avenues of financial services for a niche section, there are some issues that need to be addressed.
Rao noted that there have been several instances when even the lenders who have access to low-cost funds are charging a higher margin than the rest of the Industry. He said that in the past few quarters, there has been some moderation in interest rates in the microfinance sector, and there are pockets of high interest and high margins in the sector.
Look beyond high-yielding business
The Deputy Governor Rajeshwar Rao said that the microfinance sector should look beyond its tag of a high-yielding business. He added that the industry should work with an empathetic approach and a developmental perspective. He stressed that the microfinance sector should look at the empowering role it plays in the lives of vulnerable communities.
“The frequency of disruptions in the microfinance sector has increased of late. Incidents of high borrower indebtedness coupled with coercive recovery practices sometimes lead to tragic consequences,” Rao said.
Mis-selling products a concern
The Deputy Governor also pointed out the mis-selling of financial services like insurance products. He said that while financial inclusion entails a bouquet of financial services, pushing the same indiscriminately to unaware consumers may be detrimental to their well-being and undermine its stated intent.
“The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to the low-income households by creating artificial boundaries”, Rao added