Mumbai: Prime Minister’s economic advisory council chairman C Rangarajan has asked microfinance institutions (MFIs) to overhaul their “flawed” business model for sustainability, reports PTI.

This comes on the heels of former Reserve Bank of India (RBI) Bank governor YV Reddy likening MFIs to moneylenders.

Stating that most MFIs are either registered or unregistered non-banking financial companies (NBFCs), he said they are following a flawed business model by lending to consumption-related spends.

“Unless they change their lending model, they will not be able to sustain their business for long,” Mr Rangarajan said here while giving away best banks award instituted by the Business Today magazine last evening.

MFIs should lend more for productive purposes and not just for consumption-related expenses, he said adding bulk of the current MFI lending is towards consumption.

The former RBI chief also said MFIs should stop extending multiple loans to the borrowers as this could lead to default.

Mr Reddy last month had labelled MFIs as nothing better than traditional moneylenders and had called for stern regulation.

“Profit-seeking MFIs should be studied as they do not come under the laws relating to money lending or usury. After all, they are no better than money lenders,” Mr Reddy had said.

The nearly Rs20,000-crore MFI industry is reeling under a severe crisis following the Andhra Pradesh ordinance in October.

The ordinance sought to control interest rates charged by MFIs and also to check the coercive recovery tactics adopted by them.

This adversely impacted their collection and left them in a severe liquidity crisis. Since the ordinance, banks have slowed down their exposure to the sector.

MFIs are in the business of lending to the poor who do not have access to bank funds. These institutions source their funds from banks at an interest cost of 12%-13% and in turn lend at much higher cost of nearly 30%.

The RBI has also set up a panel to look into the entire gamut of MFI business.

On the corporates’ call for developing debt market, Mr Rangarajan said, to fuel the faster growth of the economy, the banks will have to grow 25% annually to meet the huge demand for funds from all areas of the economy.

On the back of strong Q1 and Q2 gross domestic growth (GDP) growth, the government early this week upped its growth forecast to 9% or even above this fiscal from the previous 8.5% as was projected in the budget.

He warned that banks can face “a liquidity mismatch” in times to come as increased exposure to realty and infrastructure could enhance the maturity of bank assets.

During the ceremony, Axis Bank bagged the best bank award in the large banks category for the second time in a row.

This was followed by Punjab National Bank and HDFC Bank.

Yes Bank was adjudged as the best mid-size bank, followed by Kotak Mahindra Bank and Jammu & Kashmir Bank.

In the small banks category, DBS Bank has been picked up as the No 1 followed by Scotia Bank and BNP Paribas.

The award for top three amongst the very small category, have gone to Shinhan Bank, Mashreq Bank and Oman International Bank respectively.