Indian MFIs come under scanner

India's micro-finance institutions (MFIs) are now under scanner for using strong-arm tactics to recover loans and charging high interest rates from borrowers in rural areas.
The Reserve Bank of India has set up a committee to examine the functioning of the institutions.
The high lending rate and strong-arm tactics used by some micro-finance companies have put the rural borrowers in a debt trap, resulting in suicide by more than 100 people to commit suicide in the last one year.
“We have constituted a sub-committee to look into the functioning of MFIs sector and what bearing they have on RBI policy to take further action,” Reserve Bank of India Governor Dubburi Subbarao said on Friday after a meeting of the central bank's board in Chandigarh.
The RBI intervention came a day after the government of southern Indian state of Andhra Pradesh, which has the country's highest number of microfinance institutions in rural areas, approved an ordinance yesterday, envisaging a three-year sentence and Rs 1 lakh for MFIs harassing borrowers for loan recovery.
Rao said a few finance companies come under RBI regulations but a large number of them are outside its purview of the central bank.
The MFIs get concessional funds from banks under the priority sector lending programme and so the benefits need to be passed on borrowers, Rao added.
Recently, the government had asked the public sector banks not to finance MFIs which are chargingexorbitant rates of interests from their
borrowers and RBI had accordingly asked the banks to ensure that loans they give to MFIs are in turn lent at rates prescribed by the regulatory bank.
The MFIs in Andhra Pradesh have come in for sharp criticism for charging very high interest rates, at times as high as 50 per cent, and using musclmen as loan recovery agents.