New Delhi: India’s microfinance sector is facing renewed scrutiny from the Reserve Bank of India (RBI), with Deputy Governor M. Rajeshwar Rao highlighting persistent issues such as excessive interest rates, rising borrower indebtedness and harsh recovery practices.
RBI’s Rao underscored the urgent need for reforms in lending practices within the microfinance sector.
“The [microfinance] sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates, and harsh recovery practices,” Rao added.
His remarks, published on the RBI’s website this week, reflect growing concern within the central bank over the sustainability and ethical conduct of microfinance institutions.
Banks have flagged growing stress in the microfinance portfolio since the start of the current financial year.
The challenges are being driven by multiple factors, including increased debt burdens among borrowers, a decline in rural incomes and disruptions linked to ongoing election activity.
Rao noted that even institutions with access to low-cost capital were often charging borrowers significantly higher interest margins, sometimes far above industry norms, raising questions over the fairness of such practices.
While there has been a slight reduction in microfinance loan interest rates in recent quarters, areas of elevated rates and profit margins remain.
Rao called on lenders to move beyond viewing the sector merely as a “high-yielding business” and to focus on strengthening credit assessments and eliminating coercive recovery tactics.
He also warned that flawed organizational structures and incentive models were leading to “perverse” outcomes for customers, despite many lenders having robust business strategies on paper.
“This calls for an introspection around the models,” he emphasized, urging stakeholders to realign priorities to better serve the financial wellbeing of low-income borrowers
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