MFIs need to evolve code of conduct: FM

Microfinance institutions (MFI) today got some support from Finance Minister Pranab Mukherjee.

The finance minister ruled out any immediate move to regulate these entities and also disclosed that he had suggested to the Andhra Pradesh government that some of the harsher provisions of the Ordinance promulgated by the state be amended.

Mukherjee said he had discussed the Ordinance with the Andhra Pradesh chief minister and also conveyed that certain harsh provisions in the legislation were amended. The finance ministry is of the opinion that the Ordinance requires MFIs to seek the state government’s permission for various things which are not feasible. Even in case of registration, some relaxation has been suggested.

The finance minister told the Economic Editors’ Conference that the government did not want to immediately step in to regulate MFIs and instead wanted these entities to evolve a code of conduct on interest rates and recovery norms.

“We expect that a code of conduct is evolved through which the rate of interest (charged by MFIs) is not abnormally high and there is no use of coercive mechanism to recover (dues from borrowers),” he said in response to a question.

Mukherjee also said that for improving the repayment capacity, the government wanted MFIs to lend mainly for productive purposes and not for meeting consumption needs of the borrowers.

In recent weeks, governance issues at MFIs have come to the fore and there is debate over the interest rate charged by them. The Andhra Pradesh government has also promulgated an Ordinance that requires these lenders, who cater to the needs of the under-banked or unbanked population, to register with designated agencies. Besides, MFIs have to specify the area and system of their operations, the rate of interest and recovery mechanism while registering.

The Centre has been working on a Bill to regulate the MFI business for the last three-four years.

Apart from the action initiated by the Andhra Pradesh government, the Reserve Bank of India (RBI) has also set up a panel to look into various issues related to MFIs. Mukherjee said RBI and the National Bank for Agriculture and Rural Development were working with MFIs to evolve a code of conduct.

With RBI setting up the committee, the government is likely to wait till the recommendations are received. In addition, it wants to wait and watch how MFIs move on self-regulation.