Reserve Bank of India Deputy Governor K. C. Chakrabarty said on Saturday that microfinance institutions (MFIs) should scale up their operations only after understanding their limitations.

“MFIs should develop local expertise and scale up locally. They should not scale up nationally, else they will collapse like SKS Microfinance,” Chakrabarty said at a conference on corporate governance in microfinance, organised by the Indian Chamber of Commerce here.

Crisis aftermath

According to Chakrabarty, MFIs should also refrain from charging interest rate of more than 26 per cent. “Charging an interest rate beyond 26 per cent from poor people is exploitation,” he said.

Following the crisis in the microfinance industry in Andhra Pradesh, the RBI imposed regulatory supervision on these companies and put a cap on the interest rate and margins — at 26 per cent and 10 per cent, respectively — of microfinance companies.

The industry has since then been demanding that the central bank do away with the cap. “If the microfinance companies are ready to operate without the priority sector tag, then only RBI will consider removing the cap on the interest rate and margins,” he said. With the RBI’s final guidelines on new bank licences expected to be out in the public domain soon, some MFIs such as Bandhan Financial Services are contemplating applying for banking permits.

“If MFIs want to accept public deposits then they should try to become a bank, by applying (for a) banking licence. Then, they would be regulated at par with banks. One cannot remain a microfinance company and function like a bank,” he pointed out.

Chakrabarty said MFIs would be relevant in the Indian context over the next 10-15 years, “because our banking system is more inefficient. Our banking system is not customer-focused. They are an employee-focused organisation.”

>shobha.roy@thehindu.co.in

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