New Delhi: Faulting the microfinance institutions for adopting strong arm tactics, Prime Minister's Economic Advisory Council Chairman C Rangarajan Wednesday said MFIs must modify their business models and become responsible lenders.
"Microfinance institutions which were becoming an effective alternative to money lenders can recapture that position only if they modify their business models and become responsible lenders," Rangarajan said.
Critical of the working of the MFI sector, he said "strong-arm tactics adopted in recovering loan repayments have evoked much resentment. Equally, the business models adopted by many of the large MFIs were wrong. Multiple loans to borrowers for non-productive activities are a self-defeating exercise."
The overall cost to borrowers must be maintained at a level that is consistent with the repaying capacity of the borrowers, he said, adding "loans must also be reoriented towards income earning activities".
The regulatory framework for the MFI sector, he said should prescribe a reasonable limit on interest rates and restrict multiple borrowing. "... A network of strong microfinance institutions can play significant role in achieving financial inclusion".
Rangarajan also made a case for introduction of new products and simplified procedures by banks to meet the needs of customers in rural areas.