Warning against over-regulation of MFIs

In the backdrop of questions on functioning of microfinance institutions (MFIs), Chief Economic Advisor to the government of India, Kaushik Basu, has called for regulating MFIs for more transparency in their loan contracts with the beneficiaries.

However, he also warned that over-regulation of MFIs could imperil their survival.

"The regulation of MFIs is a must, but it should not be done to the point that they go out of existence," Basu said in an interaction with journalists on the sidelines of the Lucknow University convocation.

He said regulation should ensure transparent contractual terms for loan seekers rather than capping interest rates, as microfinance was a costly service due to the small ticket size of the loans.

Microfinance had provided succour to almost 30 million people in India, he said, adding we (India) had the tendency to overregulate.

MFIs have hogged the limelight over alleged high interest rates and recovery practices. They face possible regulatory clampdown, which could erode their profits and future growth. The interest rate can be as high as 30 per cent.

"If microfinance is not there, the gullible people will turn towards money lenders, who charge over 200 per cent interest rate annually," Basu added.

Meanwhile, he said inflation had come down over the past weeks, but was still high. He forecast there would be a 'fairly sharp decline' in food prices and they would come down to single digit.

Basu said he disapproved investing of foreign exchange reserves for economic and social development projects. "Forex reserves are not owned by the Reserve Bank of India or the government. They are only its custodians. Forex reserves are subject to high volatility of the global money market," he said, referring to the crisis faced by the South East Asian economies in the late 1990s.

Earlier, delivering a lecture, he said the real driver of India's growth in recent times had been high saving and investment rates. "Going forward, we need to do more in terms of fiscal and monetary policies, ramping up infrastructure, cutting on wasteful subsidies and stemming bureaucratic slowness."