The microfinance sector continues to suffer from the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices, RBI's Deputy Governor M Rajeshwar Rao said at an address at an HSBC event for financial inclusion last week, the text of which was released by the Reserve Bank on June 9.
"The frequency of disruptions in the microfinance sector has increased of late. Incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided," said Deputy Governor Rao.
He added that regulated entities must also enhance their credit appraisal frameworks to ensure borrowers are not over-leveraged. They must also refrain from 'coercive or unethical' recovery practices, and deliver services a manner that is both 'responsible and sustainable'.
There has been some moderation in interest rates charged on MFI loans, said Deputy Governor Rao, still, pockets of high rates and elevated margins 'continue to persist'.
"Even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive. The lenders should look beyond the conventional “high-yielding business” tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities," said Deputy Governor. He stressed that in the collective interest of stakeholders, such disruptions should be pre-emptively addressed.
He also said reports of mis-selling of financial services indiscriminately to unaware consumers may be detrimental to them and to the stated intent of the MFI. "The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to the low-income households by creating artificial boundaries," the Deputy Governor added.
Emerging technologies such as AI, blockchain, and innovations under the India Stack and Unified Lending Interface (ULI) will be key to secure and inclusive financial services in the future, said the Deputy Governor.
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