RBI Deputy Governor Calls For Reforms As Microfinance Sector Faces Rising Concerns

(MENAFN- KNN India) Mumbai, Jun 10 (KNN) India's microfinance sector is under increasing strain due to persistently high interest rates, rising levels of borrower over-indebtedness, and aggressive recovery tactics, according to M. Rajeshwar Rao, Deputy Governor of the Reserve Bank of India (RBI).

Speaking at an event in Mumbai on June 5, Rao said,“The sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices.” His remarks were published on the RBI's website on Monday.

Banks and financial institutions have raised alarms over growing stress in the microfinance segment, especially since the start of the current financial year.

Contributing factors include declining rural incomes, borrower defaults, and temporary disruptions caused by ongoing elections.

Rao criticized lenders for charging higher-than-expected interest margins, even those with access to cheaper funds. Although there has been a slight decline in interest rates in recent quarters, many lenders still maintain excessively high rates and margins.

He urged microfinance institutions to move away from viewing the sector merely as a "high-yielding business" and focus on responsible lending practices.

Rao emphasised the importance of robust credit assessments to avoid over-leveraging of borrowers and called for an end to coercive recovery methods.

Rao also highlighted structural issues within microfinance organizations, stating that flawed incentive structures and business models could lead to poor outcomes for customers.“This calls for an introspection around the models,” he concluded, stressing the need for a more ethical and borrower-friendly approach.

(KNN Bureau)

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