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Microfinance: New Bill will ban multiple loans

Borrowers taking loans from microfinance institutions (MFIs) may have to pay back one loan before taking another. They may no longer be allowed to indulge in “multiple borrowing” from the same MFI or from more than one. Similarly, MFIs may also not be permitted to lend to an individual who has an outstanding loan.

The Government is likely to tackle this issue through the Micro Finance Bill by incorporating provisions that will help identify wrong-doers and discourage these practices, Finance Ministry sources told Business Line.

In this regard, the Ministry is holding talks with the Unique Identification Authority of India to evolve a system to identify persons availing themselves of multiple loans so that they will not be eligible for loans if they do not repay. The Bill, which is in the pipeline, aims to regulate MFIs.

The Ministry has learnt of instances where people have taken more than one loan from MFIs under different or bogus names. It has noted cases where persons have taken advantage of the differential rates of interest offered by different institutions and used the loan amount from one to pay the other.

The Ministry has observed that owing to competition, some MFIs have resorted to multiple-lending without looking at the repayment ability of their customers. There have also been instances of ‘ever-greening' of loans by MFIs where they have provided fresh loans to borrowers to help them repay the old ones, instead of defaulting. MFIs allegedly resort to such practices in a bid to grow fast, increase profits and investments and even to go in for initial public offers.

Industry sources said MFIs would be soon forced to write-off loans in the multiple-lending category. Sa-dhan — the country's largest umbrella body of MFIs — had attempted to create a national database of district-level MFI operations to prevent an overlap of more than one MFI operating in the same area and instances of multiple-lending. But the exercise is yet to take off as MFIs have not furnished details, they said.

“Sa-dhan members have decided to move towards reducing loan size per household to a limit of Rs 50,000 and practicing within 30 days the Sa-dhan code of conduct on transparency, governance, anti-coercive practices and training of field workers,” Mr Mathew Titus, Executive Director, Sa-dhan, said.

Source :
The Hindu Business line
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