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Informist, Monday, Jun. 9, 2025

 

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--RBI Rao: Microfin sector still suffers from high debt, interest rates 
--CONTEXT: Comments by RBI Deputy Governor Rajeshwar Rao at HSBC event 
--RBI Rao: Microfinance sector still suffers from harsh recovery practices 
--RBI Rao: Frequency of disruption in microfin sector increased recently 
--RBI Rao:Microfin cos must enhance credit appraisals to stop overleveraging 
 

 

MUMBAI – Microfinance sector, which has played an important role in financial inclusion, still suffers from the "vicious cycle" of over-indebtedness, and such regulated entities must make their credit appraisal frameworks more robust, Reserve Bank of India Deputy Governor M. Rajeshwar Rao said at HSBC's event on Financial Inclusion Thursday. His speech was uploaded on the RBI website Monday.

 

While there has been some moderation in the interest rates charged on microfinance loans in the recent quarter, there still persist a few pockets of high interest rates and elevated margins, Rao said. He said even such lenders, which were able to access low-cost funds, have continued to charge significantly higher margins as compared with the rest of the industry. 

 

"The lenders should look beyond the conventional high-yielding business tag for the sector and approach it with an empathic and developmental perspective, recognising the socio-economic role that microfinance plays in empowering vulnerable communities," Rao said. Moreover, he said there has been an increase in the frequency of disruptions in the microfinance sector recently.

 

He also noted some of the "tragic consequences" caused by high indebtedness, coupled with coercive recovery practices. Regulated entities operating in the microfinance sector should abstain from any "coercive or unethical" recovery practices, Rao said.

 

Apart from the microfinance sector, Rao also touched upon a broader theme of financial inclusion, discussing the need for strategic deployment of emerging technologies to build a more accessible, equitable, and efficient financial ecosystem. "It's RBI's belief that the Jan Dhan Yojana – Aadhar – Mobile trinity will be followed by the new trinity of Jan Dhan Yojana – Unified Payments Interface – Unified Lending Interface in revolutionising digital infrastructure and credit delivery," Rao said.

 

He noted that the development and implementation of India Stack has been instrumental in improving financial inclusion by reducing infrastructural, geographical, and linguistic frictions and has helped plug leakages. India Stack is a set of open Application Programming Interface and digital public goods that aim to unlock the economic primitives of identity, data, and payments at population scale. 

 

Noting the challenge in strong connectivity in remote and rural areas, the deputy governor said the regulated entities can develop "lightweight mobile applications and web interfaces" that could operate in low-bandwidth environments, thus helping in furthering financial literacy to the remotest part of the country.

 

While financial inclusion involves a set of services, Rao warned that pushing such bouquet of financial services indiscriminately to unaware consumers may prove detrimental to their well-being and undermine its stated intent. "There are reports of mis-selling of financial services such as insurance products," Rao said. "The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to the low-income households by creating artificial boundaries."

 

He said the central bank is examining whether it is required to frame guidelines to address mis-selling of financial products and services by regulated entities. Further, he noted a sharp rise in complaints received at the office of RBI Ombudsmen and Centralised Receipt and Processing Centres, and said regulated entities needed to analyse gaps and strengthen their processes to reverse the trend of increasing grievances.

 

On the cyber safety front, Rao said the RBI will soon make available on its website a public repository of digital lending applications that are deployed by the regulated entities.  End

 

Reported by Sourabh Kumar

Edited by Ashish Shirke

 

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