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RBI deputy governor Rao says small lenders should follow fair practices



Lenders in the microfinance sector should focus on social obligations, said RBI Deputy Governor Rajeshwar Rao

Reserve Bank of India (RBI) deputy governor M Rajeshwar Rao said lenders to the microfinance sector need to align social obligations and objectives with their operations and should not emulate the strategies adopted by mainstream financial institutions.

Addressing a conference, Mr Rao said that lenders in the microfinance sector should not forget the core principles of the sector and avoid prioritizing profitability at the cost of social and welfare goals.

“There is no denying the fact that self-reliance and financial stability are the objectives that lenders need to pursue. However, prioritizing profitability at the expense of social and welfare goals of microfinance may not be an optimal outcome,” Mr Rao emphasized in his inaugural address at the Sa-Dhan National Conference.

He cautioned that lenders should never forget the fact that balance-sheet growth should not be created by compromising on prudent conduct.

Noting the negative impact of over-indebtedness, harsh recovery practices and adverse consequences from customer harassment, Mr. Rao said these would adversely impact the microfinance sector.

“From the perspective of society, there are economic and social implications. While chasing high asset growth and returns, lenders should not throw caution to the winds. Any lapse through adverse actions of microfinance institutions can undo the tremendous progress achieved over the decades, and the sector may be unable to do so,” he said.

Referring to the age-old criticism of microfinance lenders – that they lure borrowers into debt traps, charge high interest rates and engage in harsh recovery methods – the RBI deputy governor asked them to introspect and address these issues. said to.


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