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MFIs no better than money lenders, must be regulated: Y V Reddy

Press Trust of India  |  Mumbai 

Amid the crisis in the micro finance industry, former Reserve Bank governor Y V Reddy today said the micro finance institutions (MFIs) should be regulated as they are no better than money lenders.

"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 told PTI a few hours before the launch of his second book in as many years since he left the Reserve Bank.

The comments from the former central banker, who is credited with shielding Indian economy from the global financial meltdown, comes at a time when the multi-crore rupees micro finance industry is reeling under a severe crisis.

The Andhra Pradesh government last month issued an Ordinance to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by these companies, which impacted adversely their collection and left them in a severe liquidity crisis.

Since the Ordinance has come into effect, the business of MFIs has come down with banks has slowed down exposure to the sector.

MFIs are in the business of lending to the poor who do not have access to bank funds and they source their funds from banks at a interest cost of 12-13 per cent. They in turn lend lend at much higher cost of 36 per cent.

The Reserve Bank is also setting up a panel to look into the entire gamut of MFI business.

"Micro finance is a respectable area, and the impressive profitability of our profit-seeking MFIs has attracted investments from private equity funds globally. There may therefore be merit in a detailed analysis in a sort of supervisory review, to check any incipient tendency towards irresponsible usurious lending by such profit-seeking MFIs," Reddy said.

Reserve Bank Governor Duvvuri Subbarao will launch the book titled 'Global Crisis, Recession and Uneven Recovery' this evening.

The book is collection of his speeches at various, but were not disseminated to the public, since his previous book entitled 'India and the Global Financial Crisis: Managing Money and Finance,' published in late 2009.

Expressing concern over rising capital flows into the country, he said the time has come to devise ways to control them and one should go for a less costly way of doing that.

He pointed to the Latin American countries and Eastern European countries which had witnessed a massive flight capital recently as they had refused to intervene in their forex markets and build their reserves four-five years ago.

But those countries which had built them up were the ones which survived the current crisis well.

"We should choose between the costly and less costly mode of intervention, Because buying the dollar is costly and so is not buying," Reddy said, adding, "I don't want to speculate and the governor has already has already said that with a 3 per cent CAD (of GDP) so much capital flow is manageable."

"About two-three years back, everyone thought that restriction on capital flows was bad. But now there is a rethinking about it. We should think about the action the country should take to reduce excessive capital movement and also what is the origin," he observed.

On the ongoing global crisis, Reddy said unlike the 2001 dot-com bust-led crisis or the Asian currency meltdown, the crisis now is different and the challenges that are being faced now are also unique.

"But going forward there are several challenges... what we need is a unified response, but that suits each individual country," he said, adding, "once the globalised financial sector starts moving between the borders, then it calls for more concerted and unified efforts.

"But the problem is that all the countries cannot have a unified response to the issue as all the countries need their own individual response mechanism as they can be applied only at national level and by a national government."

Reddy added that he doesn't not have a solution or a template for such an effective response system to these challenges the world economy is facing now.

On the impact of the second stimulus by the US, he said, we have to wait and see, but it is sure that  there will be some impact, he said.

First Published: Mon, November 22 2010. 19:10 IST