Microfinance institutions need to be regulated: Basu

Comparing the microfinance crisis of the country to the sub-prime crisis of the United States in terms of misinformation to people.

Comparing the microfinance crisis of the country to the sub-prime crisis of the United States in terms of misinformation to people,Kaushik Basu,the Chief Economic Advisor to the Government of India,stressed on regulatory framework of the microfinance for achieving a transparent contract system.

Basu was in Lucknow on Saturday to deliver the convocation address at Lucknow University. He was also bestowed with the honorary degree of D Litt by the university. Stressing on the need to regulate microfinance,Basu said it is a partial kind of banking and not only in India but also from the experience of the United States it can be learnt that if finance is left unregulated,it invariably runs into difficulty.

But the regulatory structure in microfinance is not as much about capping the interest rate as about making the contract transparent. The microfinance institutions must not fool people about the nature of the terms of the contract, said Basu. This type of misinformation had happened in the United States in Sub Prime Crisis,and this has happened (in India) in micro finance, he said.

However,cautioning that India tends to over-regulate up to the point of putting the industry out of existence, Basu said: Microfinance is a very expensive preposition,with small money given to a whole lot of people. So interest rate will not be as low as urban banking sector. So,we should not call an interest rate of 25 per cent extortionist because private money lenders in villages charge 200 per cent per annum and even money at 25 per cent interest rate is still desirable.

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