MFI Network, an umbrella body of non-banking finance company (NBFC) microfinance institutions (MFIs) that also seeks to serve as a self-regulatory body, admits that the sector erred in chasing a high growth trajectory at the expense of corporate best practices as it went for coercive methods in loan recovery while keeping interest rates two or three times that of banks.
"Where the MFIs went wrong was in growing too rapidly, lured by the business opportunity, without paying much thought to execution or hiring the right kind of people. And there was a disconnect between the headquarters and the field agents," MFIN CEO Alok Prasad told HT.
MFIs had faced flak for charging anywhere between 24% to 36% interest, with a net interest margin (NII) that was upwards of 12%. Prasad, however, defended the sector, claiming that the cost of funds itself was quite high for MFIs.
Following the outcry against MFIs in Andhra Pradesh, where cases of borrower suicides first came to light, the state government put in place a legislation to regulate the sector.
RBI's six-member Malegam Committee, had recommended capping interest rates at 24% with NII at 12%. A draft MFI (Development and Regulation) Bill seeks to regulate the sector and imposes stiff penalties for non-compliance.
"The halo around the sector may have been exaggerated but it wasn't entirely unmerited as MFIs sought to serve an important plank of social policy," Prasad said.