MFIs should follow respectful method of loan recovery: FM

"...Responsible financing by way of transparency, interest rate rationalisation, respectful recovery procedure must be followed by micro finance institutions," he said while listing the challenges faced by MFI industry.

He was speaking at the Microfinance India Summit 2012 here.

MFIs in some states especially Andhra Pradesh faced problems on account of use of strong arm tactics for recovery of loans. This also resulted in suicide by some borrowers.

Chidambaram also asked MFIs to verify data on borrowers with credit bureau to avoid multiple borrowing or over indebtedness.

"I will request the micro finance sector to adapt itself to the expectation of public at large, especially, with regard to their code of conduct," he said.

He further said the proposed Micro Finance Institutions (Development and Regulation) Bill, 2012 will provide adequate legislative framework for development and regulation of the sector.

"We are hopeful that the Bill will be cleared by the Standing Committee, then brought to Parliament for passage. Once the bill is passed, I hope that it will provide an adequate legislative framework for the entire gamut of micro-finance services," he said.

The legislation seeks to empower RBI to regulate the sector and fix interest rates caps on loans provided by them.

The Bill, which was drafted in the backdrop of problems faced by borrowers of MFIs in Andhra Pradesh and other states, also seeks compulsory registration of MFIs with the RBI.

Micro finance -- the business of doling out small loans at usually high interest rates to poor people who are unable to access conventional lending instruments -- has come under intense regulatory scrutiny in the wake of an Act passed by the Andhra Pradesh government.