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'MFIs are worse than moneylenders'

YV Reddy, who guided the Indian banking system as a governor of Reserve Bank of India from 2003 to 2008, said in an interview that he sees hollowness in the country's banking system. Reddy, who launched his book 'Global Crisis, Recession and Uneven Recovery', said the Indian MFIs are "worse than money lenders."

business Updated: Nov 22, 2010 23:23 IST
Sachin Kumar

YV Reddy, who guided the Indian banking system as a governor of Reserve Bank of India from 2003 to 2008, said in an interview that he sees hollowness in the country's banking system. Reddy, who launched his book 'Global Crisis, Recession and Uneven Recovery', said the Indian MFIs are "worse than money lenders." Excerpts.

Are you comfortable with profits for MFIs?
In fact, MFIs are worse than moneylenders and rather require more stringent regulations. But the problem is that many states do not have moneylenders legislation.

What kind of regulation is needed for such MFIs?
One has to understand that moneylenders are lending their money, whereas MFIs are borrowing the depositor's money from banks and then lending. So the regulation for these institutions should be more stringent.

What kind or role you see for moneylenders?
Instead of substituting moneylenders totally with a formal system you make the informal system less informal. Try to bring them into the system. Business correspondent model is some thing like that.

What kind of hollowness you see in Indian banking sector?
The banking system is not doing its main business of providing working capital to small and medium scale enterprises, which according to me is a serious hollowness.

You are also not comfortable with large size banks?
Entities, which become too big, become too big to regulate. No bank should be allowed to have large share in the banking sector. Prescribing higher capital is not a solution, if you do so you, declare that they are too big to fail and they will take higher risk.