Are microfinance institutions in a mire?

Even as financial inclusion emerges as one of the top goals of government and RBI, Microfinance Institutions (MFIs), which are the pioneers of financial inclusion, are finding themselves in a bit of soup, strangely enough for fats growth and for big profits.

Last month, the Reserve Bank of India summoned some of the representatives of microfinance institutions and warned them that the microfinance institutions could be taken off the priority sector lending of banks, if they failed to improve governance standards. So are MFIs doing too much too fast? Ramesh Ramanathan, Chairman, Janalakshmi Financial Services, answers.

Here is a verbatim transcript of the exclusive interview with Ramesh Ramanathan on CNBC-TV18. Also watch the accompanying video.

Q: You are one of the pioneers in these sectors, one who has set out some of the goals and standards for MFIs, what is your own opinion of what is happening? Do you think the worries of the regulator are justified that there seem to be too much of lending too fast and too much of recklessness?

A: I am certainly not one of the pioneers and that should go to stalwarts like Vijay Mahajan and Aloysius Fernandes and some of the more recent large microfinance organizations that have proven that this is indeed scalable, sustainable proposition. But the question that the regulator has raised is an important one. I would say that the responses we can think of are broadly in two buckets. Is the micro finance fraternity having an impact on the issues of financial inclusion? The answer to that clearly is yes. Over the last 6-7 years the numbers prove that, over Rs 10,000 crore of lending and so on.

The second question, 'is it responsive?' Any sector that grows the way microfinance has grown is bound to have some of these growth pangs. Yes, there are concerns, but the question to ask is, 'is there a self correcting component in how the sector is growing?' And if you see the developments over the last few months, whether it's on the Sa-Dhan side or whether it is on the new structure that is being created which is Microfinance Institutions Network (MFIN), the answers are yes, there is a response. There is lot of self regulation that is going on. There is lot of corrective introspection that has been taking place which are addressing the challenges that the sector faces.
 
I would, therefore, say that the signals are very positive, that the sector is responsive to the questions and the concerns of the regulator. Within that there will be multiple variants and that is part of the power of the sector, that there is not single model, there are number of different models that are being tried out.