Hyderabad, October 13: Worry lines are creasing the faces of MFI honchos with the government mulling a decree to keep them in line.
“The situation is bad and there’s a fair amount of distress because of MFI practices,’’ said Subramanyam, principal secretary, rural development. “We don’t know yet whether it will be an Act or an ordinance or just an agreement. But there will be something very shortly.”
On the other hand, MFIs, registered as non-banking financial corporations (NBFCs), say they can be regulated only by the RBI and that the state or central governments have no powers of regulation. “We welcome the state’s move to sanitise the industry. But does it have the powers to do so?” asked Padmaja Reddy, promoter of Spandana Microfinance. Industry players on Tuesday met government reps seeking clarity on the proposed ordinance. But nothing concrete emerged.
Of the several things discussed, capping of interest rates was one. Currently, MFIs borrow funds from public and private sector banks at 12-13 per cent interest. Add to this the 10 per cent the operating costs incurred by them and a profit margin of 2-3 per cent, the effective interest rate for borrowers is upwards of 25 per cent.
“Addressing this issue, the Orissa government signed a pact with MFIs under which MFIs cannot charge more than 28 per cent interest,” said Ramana, former head of Basix and member of Saadhan, an industry body. However, this model may not work for all locations. For instance, operating costs in remote districts are higher. “As a result, MFIs will stop operating in such locations. Secondly, if profit margins are not high, availability of capital will be an issue, in which case the state government should help,” he said.
Then comes the issue of loan recovery. MFIs say their mechanisms are fair and transparent mechanisms; it’s the trusts and societies that are to blame. “They charge exorbitant interest and are tough when it comes to collection. These trusts and societies are exempt from tax and free of public scrutiny,” adds Reddy.
–Agencies