Mumbai: On the heels of former Reserve Bank of India governor Y. V. Reddy terming microfinance institutions (MFIs) as moneylenders, his predecessor and the PM’s economic advisory council chairman C. Rangarajan has called for an overhaul of their business model if they want to survive.
Stating that most MFIs as either registered or unregistered NBFCs, he said they are following a flawed business model by lending to consumption-related spends.
“Unless they change their lending model, they will not be able to sustain their business for long. They should lend more for productive purposes and not just for consumption- related expenses. Bulk of the current MFI lending is towards consumption,” Rangarajan said here last evening while giving away best banks award instituted by Business Today magazine.
The former RBI chief also said, MFIs should stop extending multiple loans to the borrowers as this could lead them these borrowers to default.
In an interview to the news agency on 22 November, Y. V. Reddy had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation. “Profit-seeking MFIs should be studied as they do not come under the laws relating to money lending or usury. After all, they are no better than money lenders,” Reddy had said.
The nearly Rs20,000-crore MFI industry is reeling under a severe crisis following the Andhra Ordinance in October that sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them, impacting adversely their collection and left them in a severe liquidity crisis. Since the Ordinance, banks have slowed down their exposure to the sector.
MFIs are in the business of lending to the poor who do not have access to bank funds and they source their funds from banks at an interest cost of 12-13% but they in turn lend at much higher cost of nearly 30%. The Reserve Bank has also set up a panel to look into the entire gamut of MFI business.
On the corporates’ call for developing debt market, Rangarajan said, to fuel the faster growth of the economy, the banks will have to grow 25% annually to meet the huge demand for funds from all areas of the economy.
On the back of strong Q1 and Q2 GDP growth, the Government early this week upped its growth forecast to 9% or even above this fiscal from the previous 8.5% as was projected in the Budget. While GDP logged in a smart 8.8% in Q1, the numbers for Q2 was even better at 8.9%. This robust Q2 numbers are despite the fact that IIP figures for August and September were abysmally low at 5.6% and 4.4 % respectively but a strong show by farm and services sectors made up for the poor show by manufacturing.
Since most of the investment to help drive the faster economic growth will be into infrastructure projects, which demand huge amount of long-term funds, he warned that the banks can face “a liquidity mismatch” in the times to come as increased exposure to realty and infrastructure will increase the maturity of bank assets.