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The business model of the microfinance sector must change, emphasised C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, at a conference on the sector in New Delhi.
He said the microfinance movement must have as its ultimate goal the desire to help the poor and enable them to come out of poverty. Providing credit for productive purposes at reasonable rates of interest must be the goal, he said.
He said two initiatives could provide a significant surge for microfinance institutions (MFIs). One, the growth of the bank self-help group linkage programme. Two, expansion of the programme for business correspondents (the intermediaries who help expand a bank's business, for a fee).
The two will constitute the main pillars of the future development of bank-related microfinance even as other forms of microfinance institutions will continue to grow, Rangarajan said.
He was speaking at the Microfinance India summit, organised by ACCESS, a non-profit organisation (NGO).
He asked MFIs to be transparent on the interest rates they charged. He said it was necessary for MFIs to keep the overall cost to the borrowers at a level consistent with the repaying capacity of borrowers.
