MFIs under stress, but not threat, says Gokarn

Dismissing reports that the microfinance sector was on the verge of collapse, Reserve Bank of India (RBI) Deputy Governor Subir Gokarn today said it was under stress but not threat. He acknowledged the role of microfinance institutions (MFIs) in the financial inclusion road map laid down by the central bank.

“There’s a risk once you get in a situation because of constraints that the sector has been placed under, as banks are finding it difficult to justify lending. We don't think the system is under threat, though it has put some stress on the sector,” Gokarn said on the sidelines of a programme on financial inclusion organised by United Bank of India.

Simultaneously, Gokarn indicated that banks were not a substitute of MFIs. “MFIs constitute an important component of our financial inclusion strategy. The last mile that MFIs are able to cover is not something that the formal financial sector is able to. They remain an important part of the system,” said Gokarn.

A recent ordinance by the Andhra Pradesh government on regulating MFIs put a spanner in the high growth of the sector over the last decade, following which banks stopped lending due to non-recovery of dues.

RBI last month constituted a committee under the chairmanship of Y H Malegam, a senior member of its central board of directors, to studying the functioning of MFIs.

The committee would submit its report by the middle of January. RBI had asked the committee to keep its timeframe short in the light of the recent stress on MFIs, said Gokarn. MFIs needed to work in conformation with principles consistent with the overall financial inclusion agenda and boundaries of the overall busiss conduct, Gokarn added.