MFIs shouldn't sacrifice social mandate at altar of growth: RBI dy governor

M Rajeshwar Rao urges them not to forget sector's original mandate of financial inclusion, as over-indebtedness by borrowers, coercive recovery would roll back gains achieved over the years

Reserve Bank of India (RBI) deputy governor, M Rajeshwar Rao, said it is necessary that the microfinance sector (MFI) does not forget its original mandate of financial inclusion in order to grow, as over-indebtedness by the borrowers and coercive recovery tactics would roll back all the gains achieved over the years.

“Negative consequences of over-indebtedness, harsh recovery practices and adverse outcomes arising from harassment of customers will adversely impact the MFI ecosystem,” Rao said in his keynote address at Sa-Dhan National Conference on ‘revitalising financial inclusion’. Sa-Dhan is a self-regulatory organisation of micro lenders.

“While chasing higher asset growth and returns, lenders should not throw caution to the winds. Any slip-up through adverse actions of the MFIs may undo the tremendous progress achieved over the decades and the sector can ill-afford to do that,” Rao said, adding that the roots and origin of micro loans should not be forgotten for the sake of profit.

The lenders must pursue “self-sufficiency and financial sustainability” as the objectives, while “prioritization of profitability at the expense of social and welfare goals of the micro finance may not be an optimal outcome,” the deputy governor said.

The RBI in June had proposed a debt-income ratio cap, and had said the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income.

The central bank had lifted the interest rate cap imposed on the sector, and a set of common guidelines on micro loans irrespective of the lending institution.

In his speech, Rao said the cap on the loan repayment obligation of a household as a percentage of the household income is expected to address the inability of the microfinance borrowers to repay the loan. The collateral free micro loans, which the regulator proposed in June, will also help further the cause, he said.

Micro lenders must understand the needs of the borrowers and provide them with adequate support through appropriate financial products. The customers often have lower levels of financial awareness and literacy and are often too desperate to turn away any source of credit.

“Therefore, they need to be treated with care and empathy and should not be considered as a mere data points for investor presentations,” the deputy governor said, requesting the MFIs not to “mimic the strategies of mainstream finance.”

The lenders must have strong corporate governance to balance their social and growth objectives.

Technology will help the sector meet its operational challenges and cost, and can automate the processes for customer on-boarding, improving the credit monitoring system and enabling digital modes of loan and other payments.

While the RBI encourages the use of technology, “customer protection should not be compromised in the process and customer should get the similar experience in digital mode, if not better.”

An immediate focus area for MFIs should be to revamp the risk management systems, improving the skills of the field level staff and institution of an effective grievance redressal system, the deputy governor said.