THE finance ministry has batted for micro-financial institutions that have come under severe reprimand

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by Andhra Pradesh government recently for coercive tactics in dealing with recoveries.

In its mid-term review, the finance ministry has taken a lenient view of the micro-finance institutions (MFIs) business model. But the review recognises the need to regulate the sector.

This has also come at a time when original conceiver of the model Bangladeshbased Nobel laureate Mohammad Younus faces charges for diverting and misappropriating funds worth $100 million.

"Micro-financing is an innovative concept for meeting credit needs of the poorest sections of society, who were earlier believed to be unbankable, through providing small denomination loans for businesses and key expenses. It is a means of financial inclusion," the document said.

The financial inclusion angle also goes well with the UPA's avowed objective of achieving economic inclusion of deprived sections.

The ministry recognised that the extent of all combined MFIs credit was around $6.7 billion and has nearly 30 million beneficiaries.

Accepting the need for regulation in the sector, the document sought to end ambiguity in contracts offered by MFIs to its borrowers and set out clear guidelines for recovery.

"Borrowers are systematically deluded about sim ple interest rates and compound interest rates. People end up borrowing money under terms, which, if they had fully understood, they would never have accepted.

This is what needs to be regulated,” it said.

Since its introduction in the country some five years back, the sector has regis

tered a year-on-year growth rate of 70-80 per cent. The business of extending credit to poor has since then also witnessed active participation from public, private, and foreign banks, private equity funds and venture capitalists.

"This sector and has emerged as a major profit centre activity with private equity institutions reportedly investing US $ 500 million in last two years. The system has come under attack lately because of farmers suicides, especially in Andhra Pradesh that accounts for nearly 30 per cent of the micro-finance portfolio in the country. The high interest rates of 26 to 30 per cent per annum and coercive methods of recovery are regarded as the contributing factors," it noted.

MFIs have recently been de-authorised by Andhra Pradesh government from using coercive recovery methods like agents to collect payments on loans from individuals. An Association of MFIs had contested the Andhra Pradesh government's move in Supreme Court but has also acceded to accepting many of its recommendations. Taking a call on the need to monitor and regulate the sector, finance ministry document said, "While we do need to regulate micro-finance, we must not make the mistake of regulating it out of existence."

The review said that by providing credit to the poor, MFIs may have also saved lives, as in its absence poor villagers turn to informal village moneylenders who charge exorbitant rates of interests ranging up to 200 per cent compounded per year.