Rangarajan seeks recast of MFI biz model

MUMBAI: PM's economic advisory council chairman C Rangarajan has asked microfinance institutions (MFIs) to overhaul their "flawed" business model for sustainability.

This comes on the heels of former RBI Bank governor Y V Reddy likening MFIs to moneylenders,

Stating that most MFIs are either registered or unregistered NBFCs, he said they are following a flawed business model by lending to consumption-related spends.

"Unless they change their lending model, they will not be able to sustain their business for long", Rangarajan said here while giving away best banks award instituted by Business Today magazine last evening.

MFIs should lend more for productive purposes and not just for consumption- related expenses, he said adding bulk of the current MFI lending is towards consumption.

The former RBI chief also said MFIs should stop extending multiple loans to the borrowers as this could lead to default.

Reddy last month had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation.

"Profit-seeking MFIs should be studied as they do not come under the laws relating to money lending or usury. After all, they are no better than money lenders," Reddy had said.

The nearly Rs 20,000-crore MFI industry is reeling under a severe crisis following the Andhra Pradesh Ordinance in October.

The ordinance sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them.

This adversely impacted their collection and left them in a severe liquidity crisis.

Since the Ordinance, banks have slowed down their exposure to the sector.