RBI Deputy Governor Rao Says Small Lenders Should Follow Fair Practices

Microfinance sector lenders need to align social obligations and objectives with their operations and should not emulate strategies adopted by mainstream financial institutions, said deputy governor of the Reserve Bank of India (RBI) M Rajeshwar Rao.

Addressing a conference, Mr Rao said that lenders in the microfinance space should not forget the basic tenets of the sector and prioritising profitability at the expense of social and welfare goals should be avoided.

“There is no denying the fact that self-sufficiency and financial sustainability are the objectives that the lenders need to pursue. However, prioritisation of profitability at the expense of social and welfare goals of microfinance may not be an optimal outcome,” Mr Rao emphasised in his inaugural address at the Sa-Dhan national conference.

He cautioned that lenders should never forget the fact that balance-sheet growth should not be built by compromising on prudent conduct.

Referring to the negative impact of over-indebtedness, harsh recovery practices and adverse outcomes from harassment of customers, Mr Rao said that these will adversely impact the microfinance sector.

“From society's perspective, there are economic and social implications. While chasing higher asset growth and returns, lenders should not throw caution to the winds. Any slip-up through adverse actions of microfinance institutions may undo the tremendous progress achieved over the decades, and the sector can ill-afford to do that,” he said.

Referring to the age-old criticism of the microfinance lenders – that they lead borrowers into a debt trap, charge high interest rates and engage in harsh recovery methods – the RBI deputy governor asked them to introspect and address these issues.