High Interest 'Harsh Recovery in Microfinance: RBI

Mumbai, Jun 9 (PTI) Microfinance continues to suffer from the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices, RBI Deputy Governor M Rajeshwar Rao has said.

Addressing HSBC's event for financial inclusion here last week, the senior Reserve Bank official noted that microfinance has placed itself as a promising avenue for providing formal financial services to the excluded sections of the population.

While microfinance has played an important role in financial inclusion, some issues need attention, Rao said.

"The sector continues to suffer from the vicious cycle of over-indebtedness, high interest rates and harsh recovery practices. While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist," he added.

Even lenders with access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and in several instances, appear to be excessive, Rao said.

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, the deputy governor pointed out.

"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," Rao said.

He stressed that it is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided.

In this regard, he said regulated entities must also enhance their credit appraisal frameworks to prevent overleveraging of borrowers.

"Additionally, they must eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable," he said.

In his address, he also mentioned reports of mis-selling financial services like insurance products.

While financial inclusion entails a bouquet of financial services, pushing the same indiscriminately to unaware consumers may be detrimental to their well-being and undermine its stated intent, the RBI official said.

"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," he added.

Rao said the Reserve Bank is examining whether it necessitates framing guidelines to address mis-selling of financial products and services by regulated entities.