For-profit MFIs are leveraged money lenders: Y V Reddy

Despite being lauded by do-gooders as the answer to the credit problems of rural South Asia, microfinance institutions (MFIs) are definitely not in the good books of Indian policy-makers. While non-governmental organisations praise them for spreading credit to areas outside the official lending net, MFIs are at the same time accused of charging usurious interest and using coercive methods of debt collection.

Lending support to the mandarins' views is former Reserve Bank of India governor Yaga Venugopal Reddy, who has equated microfinance lending with the activities of sub-prime lenders in the United States.

In a spate of media interviews following the release of his book Global Crisis: Recession and Uneven Recovery on Monday, Reddy said for-profit MFIs should be treated on a par with money-lenders and should not be subject to soft regulation, as they are a bigger risk to the system than individual lenders who extend loans out of their own net worth.

The in-vogue concept of 'financial inclusion' - more a catchword than a serious government commitment – has also come under Reddy's hammer. He says some financial intermediaries are looking to exploit the situation in the guise of financial inclusion, and new unregulated entities are getting a toehold in the financial sector in the name of technology.

On the issue of banking licences to corporate houses, lately much debated in the media, Reddy said, ''The debate should not be whether to give new licences, but whether a bank's dominant owner can be an industrial house or not.

If there is a conflict of interest (between the bank promoter and the bank), then how do we address ownership and governance issues? Then there is a universal recognition that banks are special, which again means that there should be discomfort if there is a serious conflict of interest involving banks.''