Microfinance reforms

The sector should listen to RBI's Rao and look beyond the conventional high-yielding business tag

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Reserve Bank of India's Deputy Governor M. Rajeshwar Rao hit the nail on the head recently when he urged the micro-finance sector to do some soul-searching and go in for urgent internal reforms. The advice is timely as the sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices. Even lenders with access to low-cost funds have been found to be charging significantly higher margins than the industry norm, which, in several instances, appear excessive. Rao's prescription: "Lenders should look beyond the conventional high-yielding business tag". His speech comes amid growing scrutiny of microfinance practices in India, particularly in rural and low-income segments, where aggressive lending and recovery have led to borrower distress. Despite RBI's regulatory overhaul in March 2022, including interest rate caps and revised customer protection guidelines, concerns about implementation remain.