Rangarajan for recast of MFI business model

The chairman of the Prime Minister’s economic Advisory Council, C Rangarajan, has asked microfinance institutions (MFIs) to overhaul their “flawed” business model for sustainability.

This comes on the heels of former Reserve Bank of India (RBI) Governor Y V Reddy likening MFIs to moneylenders. Stating that most MFIs were either registered or unregistered NBFCs, he said they were following a flawed business model by lending for consumption-related expenses.

“Unless they change their lending model, they will not be able to sustain their business for long”, said Rangarajan.

MFIs should lend more for productive purposes and not just for consumption-related expenses, he said, adding the bulk of the current MFI lending was for consumption.

The former RBI chief had also said MFIs should stop extending multiple loans to borrowers as this could lead to default. Last month, Reddy had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation for them.

“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 had said.

The nearly Rs 20,000-crore MFI industry is reeling under a severe crisis following the Andhra Pradesh Ordinance in October. The ordinance sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them. This adversely impacted their collection and left them in a severe liquidity crisis. Since the Ordinance, banks have slowed down their exposure to the sector.

MFIs are in the business of lending to the poor who did not have access to bank funds . They source their funds from banks at an interest cost of 12-13 per cent and, in turn, lend at a much higher cost of nearly 30 per cent. RBI has also set up a panel to look into the entire gamut of MFIs.