Context:
In a recent address at an HSBC event on financial inclusion, RBI Deputy Governor M. Rajeshwar Rao expressed concerns over widespread misselling by financial institutions and persistent issues in the microfinance sector. His speech was later published on the RBI website.
Key Issues Highlighted
Misselling of Financial Products
- RBI is examining whether new guidelines are needed to regulate misselling of financial products by banks and NBFCs.
- Misselling includes pushing products (e.g., insurance) without assessing customer suitability and financial awareness.
- Such practices can erode trust in welfare schemes designed to provide a safety net for low-income groups.
High Interest Rates in Microfinance
- Private banks and Small Finance Banks (SFBs) with microfinance exposure are reportedly charging excessive interest rates, despite access to low-cost funds.
- Some institutions charge significantly higher margins than the industry average, which is seen as exploitative.
Over indebtedness and Recovery Practices
- The microfinance sector suffers from a cycle of over indebtedness, coercive recovery, and financial distress.
- Disruptions and borrower distress have become more frequent in recent years.
RBI’s Prescription for Responsible Lending
- Lenders must:
- Strengthen credit appraisal systems to prevent overleveraging.
- Avoid any form of coercive or unethical recovery.
- Ensure services are delivered in a sustainable and ethical manner.
- Rao stressed that financial inclusion must not come at the cost of consumer protection and dignity.
Call for Business Model Introspection
- Rao urged institutions to reflect on whether their incentive structures or operational models are creating perverse outcomes.
- Emphasized the need to go beyond the “high-yielding microfinance” mindset and adopt a developmental and empathetic approach.
Regulatory Signal
- RBI is likely to:
- Introduce specific norms to curb misselling.
- Reassess interest rate transparency in the microfinance sector.
- Make effective grievance redressal mechanisms mandatory across regulated entities.
BS
