NEW DELHI: C Rangarajan, chairman of Prime Minister’s Economic Advisory Council (EAC), has said that microfinance institutions should be recognised as non-banking finance companies (NBFCs) in order to be regulated.
The former RBI chief, who is also heading the committee on financial inclusion, said on Wednesday that there should be no relaxation as far as norms on capital base is concerned, and these institutions should be regulated by Nabard.
The bill on microfinance institutions, now under consideration of the government, does not consider these institutions as NBFCs. “Microfinance NBFCs can become business correspondents for banks, but they should not be correspondents on the lending side, because it may lead to a conflict of interest,” Mr Rangarajan said.
The EAC chief was delivering the valedictory address at a seminar on microfinance. The proposal has the potential to become a shot in the arm for the microfinance sector.
Mr Rangarajan said the proposed microfinance NBFCs should have 80% asset base in microcredit, providing farm loans up to Rs 5,000 and a housing loan up to Rs 1,50,000.
Mr Rangarajan emphasised flexibility in the interest rates charged by microfinance institutions, but said that the pure interest rate component should be separated from the cost of services.
“They must ensure that earning capacities of borrowers must be enhanced. The overall cost has to be maintained to be consistent with repayment capacities,” he said.
While the SHG-bank linkage has proved to be a low cost model in reaching out to small borrowers, it needs to be strengthened, he said.