Microfinance key to financial inclusion: RBI

Microfinance institutions (MFIs) in India, squeezed by regulation in Andhra Pradesh, are an integral part of financial inclusion but are under stress at the moment, a Reserve Bank deputy governor said on Tuesday.

"The MFI industry might be under (a) little stress as the banks are finding it difficult to lend to them at this moment. But the system as a whole is not under threat," Reserve Bank of India Deputy Governor Subir Gokarn told reporters on the sidelines of an event on the outskirts of Kolkata.

An RBI subcommitee, formed in late October in response to an ordinance passed by the Andhra Pradesh government to look into issues faced by the microfinance industry, is expected to submit its recommendations by mid-January, Gokarn said.

"MFIs are an integral part of financial inclusion but their operations must be consistent with the financial inclusion policy," Gokarn said.

The Andhra Pradesh ordinance took effect in October in response to complaints over high interest rates, aggressive loan recovery practices and overextended borrowers, and has severely curtailed the activities of MFIs in the state, which had been their largest single market in India.

Microfinance institutions, which make loans to low-income borrowers averaging about $140, have reduced their lending rates in the state and are considering doing so in other parts of the country, potentially squeezing profitability.

Shares in SKS Microfinance, the country's only listed microfinance lender, have fallen by more than half since a late September peak.

The industry has about $4.6 billion of loans outstanding in India.

The state-level ordinance has been criticized by some lenders and investors as too restrictive and over-reaching in its proposed controls, and has had the effect of curbing bank credit to the sector across India.

India's finance minister and central bank officials and senior state bankers have spoken up in support of the industry.

"My idea is not to strangulate it but to regulate," Finance Minister Pranab Mukherjee told a panel on November 19.