MICROCAPITAL BRIEF: Article Defends Indian Microfinance Institutions (MFIs) from Calls to Rein in Profitability

An article was published recently on the website of the Economic Times newspaper defending the Indian microfinance industry from more regulation, especially caps that might restrict the profitability of microfinance institutions (MFIs).

Sugata Ghosh, the author, cites a profit margin of 5 percent to 6 percent as the primary motivation behind the recent backlash against the industry. He argues that the proposed cap could force many MFIs to shut down or encourage them to increase revenue by charging obscure fees. However, he also commented that “there may be some logic to” removing the priority sector status of the microfinance industry, a status that allows MFIs to raise funds at lower interest rates.

The author urges the Reserve Bank of India (RBI), the central bank of India, to encourage more entrepreneurs to enter the microfinance industry arguing that it is competition, rather than regulation, that would bring interest rates down and ultimately benefit the people in need.

About the Reserve Bank of India (RBI):
Established in 1935, the Reserve Bank of India undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. RBI consists of twenty-two regional offices.

By Trevor Kwong, Research Assistant

Sources and Additional Resources:
Source Article: The Economic Times: SKS: A hot potato called microfinance institutions:

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