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LATEST NEWS UPDATES | MFIs vs moneylenders

MFIs vs moneylenders

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published Published on Oct 18, 2010   modified Modified on Oct 18, 2010

The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance, 2010, suggests there’s more politics than understanding of economics that went into it. The setting up of district registering authority under the ordinance, with elaborate powers to even cancel licences, will increase risks of operations posing serious hazard to business plans and will jeopardise the whole MFI network. Especially stifling is the requirement that MFIs have to submit a monthly statement to the registering authority giving the list of borrowers, the loan amount and the interest rate charged, which is proprietary information of the credit agency. And though the provision that the interest collected should not exceed the principal may sound reasonable, it can be the first step that paves the way for a direct cap on interest rates at a later stage. Interest rates and repayment amounts vary across board. Some lenders get at the prime lending rate, some above it, and some below. And, in the case of even the most credit-worthy person you can imagine, consumer loans cost more than housing loans since the housing loans have collateral that can be attached by the bank. Equally intriguing is the assurance that high-cost MFI loans be swapped with low-cost bank loans. How the Andhra government can hope to make commitments on behalf of PSUs and private banks is unclear, but surely it must be obvious that borrowers went to MFIs only because banks were not willing to lend to them, and presumably because the MFIs were cheaper than other informal sources, including moneylenders.

Andhra Pradesh chief minister K Rosaiah’s threats to take stringent action against the MFIs, for charging what he calls unreasonably high interest rates, and to put down the activities of the so-called unregulated MFIs with an iron hand, will not only discourage the MFIs from providing credit to the poor but also push them back into the hands of the usurious moneylenders, who were historically the only source of loans to the poor. The only reasonable point made by the chief minister was the need to curb the arm-twisting methods used by the MFIs to recover the loans. Coercion and use of unethical practices for loan recovery has to be firmly dealt with by the state and there are enough provisions in the legal statutes to deal with such crimes.
 

The Financial Express, 18 October, 2010, http://www.financialexpress.com/news/fe-editorial-mfis-vs-moneylenders/698745/


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