6.3. Issues Related to Microfinance Institutions

♤ Higher rates of Interest: MFIs’ charge a very high rate of interest (12-30%) as compared to commercial banks (8-12%). Recently, the RBI (India’s regulatory bank) announced the removal of upper limit of 26% interest on MFI loans. This has worsened the situation for customers and led to farmer’s suicide in states like Andhra and Maharashtra.

♤ Over-dependence on banking sector: Around 80% of their funds come from banks. Most of these are private banks charge a high rate of interest and also the term of loans is of

shorter period. It makes them incompetent and less reactive to cases of default and delinquencies.

♤ Lack of awareness of financial services: Financial literacy is very low in India. About 76% of the population do not understand basic financial concepts. MFIs struggle to make their business more financially viable due to this lack of awareness

♤ Regulatory Issues: RBI is the regulator for MFIs. But needs and the anatomy of micro finance industry is supremely different from that of banks. Regulatory issues have led to sub-optimal performance and failure in the development of new financial products and services

♤ Appropriate Model: Most of the MFIs follow SHG or JLB model. Most of the time selection of model is not scientific in nature. It affects the sustainability of the organisation in the long-run and also increases the risk of borrowings for the poorer section beyond they can bear.