On the heels of former Reserve Bank governor Y V Reddy terming microfinance institutions (MFIs) as moneylenders, his predecessor and the PM's economic advisory council chairman C Rangarajan has called for an overhaul of their business model if they want to survive.
Stating that most MFIs as either registered or unregistered NBFCs, he said they are following a flawed business model by lending to consumption-related spends.
"Unless they change their lending model, they will not be able to sustain their business for long. They should lend more for productive purposes and not just for consumption-related expenses. Bulk of the current MFI lending is towards consumption," Rangarajan said here on Wednesday evening while giving away best banks award instituted by Business Today magazine.
The former RBI chief also said, "MFIs should stop extending multiple loans to the borrowers as this could lead them these borrowers to default."
In an interview to PTI on November 22, YV Reddy had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation. "Profit-seeking MFIs should be studied as they do not come under the laws relating to money lending or usury. After all, they are no better than money lenders," Reddy had said.
The nearly Rs 20,000-crore MFI industry is reeling under a severe crisis following the Andhra Ordinance in October that sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them, impacting adversely their collection and left them in a severe liquidity crisis.
Since the Ordinance, banks have slowed down their exposure to the sector.