Stop chasing profits at customers' expense, RBI Deputy Governor tells MFIs

The RBI deputy governor reminded the industry that their customers often have lower level of financial awareness and literacy and ‘are often too desperate to turn away any source of credit’.

Micro-finance lenders must refrain from chasing profits and introspect on the ‘negative consequences’ of pushing their borrowers into a debt trap, using harsh recovery practices and harassing customers as this could undo the sector’s progress, a top central banker said on Wednesday.

Arguing that there is no longer a level-playing field in the sector as specialised micro-finance institutions (MFIs) governed by the central bank’s regulatory framework now account for just 30% of gross loans, Reserve Bank of India Deputy Governor M Rajeshwar Rao said this is posing ‘difficulties for customers’ and divergence in practices.

Addressing the national conference of MFIs’ self-regulatory organisation Sa-Dhan, Mr. Rao also stressed that lenders partnering with fintech firms to deliver services and on-board customers must ensure that customer protection needs are not compromised in the process.

Urging MFIs to turn their immediate focus towards revamping their risk management systems, improving the skills of the field level staff and institutionalising an effective grievance redressal system, Mr. Rao emphasised that lenders should not throw caution to the winds to chase higher asset growth and returns.

As per the Bharat Microfinance report released on the occasion, field collections have been returning to ‘near normal’ since July after the pandemic’s deleterious effects last year. Sa-Dhan executive director P Sathish said that fresh disbursements have resumed with a pick up in the pace of economic activity but there appears to be significant rise in non-performing assets.

“If we continue with the positive growth, the industry might touch ₹3,00,000 crore in the current fiscal, if not more (from a little over Rs 2.52 lakh crore as on March 31, 2021),” he noted. The portfolio at risk (with dues pending over 30 days) deteriorated to 5.24% in 2020-21 from 0.36% in 2019-20, as per the report.

The RBI deputy governor reminded the industry that their customers often have lower level of financial awareness and literacy and ‘are often too desperate to turn away any source of credit’. “Therefore, they need to be treated with care and empathy and should not be considered as mere data points for investor presentations,” he asserted, urging MFIs not to ‘mimic’ mainstream finance strategies and balance social objectives with their credit operations.

“The roots and origin of micro finance should not be forgotten and sacrificed at the altar of bottom-line growth… prioritisation of profitability at the expense of social and welfare goals of the micro finance may not be an optimal outcome,” he concluded, warning MFIs against growing their balance sheets by ‘compromising on prudent conduct’.

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