Microfinance sector in India has been growing rapidly for the past few years and at present the total credit outstanding in this industry is Rs 12000 Crores, which is has been growing at the rate of over 90% per annum. The repayment rate of MFI’s is at an amazing 98%. Also the private equity investors are estimated to have invested around Rs 2000 crores in the industry.

Usually the MFIs are seen as saviours for the poor and unbanked giving them access to credit. However these MFIs have turned out to be charging extremely high rates of interest coming to an average of 22-24%, while getting extremely cheap funding from banks in the form of priority sector funding along with huge inflow of Private Equity. The returns in the microfinance industry are high and luring due to low incidences of delinquency, lax regulation on lending rates, low NPA’s and cheap funding available.

Even in smaller countries like Bangladesh the lending rates of MFI’s are much lower than those prevalent in India. In Brazil there is a cap on the rate at which money can be lent.

There is a felt need that RBI should also come out with some regulations on lending activities in India too. There is today a strong need for proper regulation of such entities and also ensuring that they do not become profiteering & rent seeking machines.