RBI mulls stricter norms to curb mis-selling, flags high microfinance interest rates

“The microfinance sector continues to suffer from the vicious cycle of over-indebtedness, high interest rates, and harsh recovery practices,” Rao said, adding some of these players, despite having access to low-cost funds, have been found to be charging significantly higher margins than the rest of the industry, which, in several instances, appear to be “excessive”.

“While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist,” Rao said emphasising that lenders must enhance their credit appraisal frameworks to prevent overleveraging of borrowers.

“Additionally, they must also eschew any coercive or unethical recovery practices, ensuring that financial services are delivered in a manner that is both responsible and sustainable,” he said.

Calling for introspection of the business models of microfinance players, Rao said, “while the business model may be sound, the organisational structure, and the incentive schemes framed to deliver services may be flawed, resulting in perverse outcomes for customers. This calls for an introspection around the models.”

He also expressed concern over grievance redressal mechanism for MFI borrowers saying effective redressal is non-negotiable for financial sector enterprises because non-resolution of consumer complaints not only leads to erosion of customer base but also results in loss of trust in the broader financial system, and deters new consumers from entering the system.