MFIs no better than money lenders, must be regulated: YV Reddy

MFIs no better than money lenders, must be regulated: YV Reddy

Mumbai: Amid the crisis in the micro finance industry, former Reserve Bank governor Y V Reddy on Monday said the micro finance institutions (MFIs) should be regulated as they are no better than money lenders.

“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 told PTI a few hours before the launch of his second book in as many years since he left the Reserve Bank.

The comments from the former central banker, who is credited with shielding Indian economy from the global financial meltdown, comes at a time when the multi-crore rupees micro finance industry is reeling under a severe crisis.

The Andhra Pradesh government last month issued an Ordinance to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by these companies, which impacted adversely their collection and left them in a severe liquidity crisis.

Since the Ordinance has come into effect, the business of MFIs has come down with banks has slowed down 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 a interest cost of 12-13%. They in turn lend lend at much higher cost of 36%.

The Reserve Bank is also setting up a panel to look into the entire gamut of MFI business.

“Micro finance is a respectable area, and the impressive profitability of our profit-seeking MFIs has attracted investments from private equity funds globally. There may therefore be merit in a detailed analysis in a sort of supervisory review, to check any incipient tendency towards irresponsible usurious lending by such profit-seeking MFIs," Reddy said.

Reserve Bank governor Duvvuri Subbarao will launch the book titled ‘Global Crisis, Recession and Uneven Recovery´ this evening.

The book is collection of his speeches at various, but were not disseminated to the public, since his previous book entitled ‘India and the Global Financial Crisis: Managing Money and Finance,´ published in late 2009.