Chidambaram states yesterday what he should have a long time ago. Recognising that 22-25% percent interest charged by MFIs could reflect actual costs of transactions and put to rest attempt of some states to cap interest rates. What must be kept in mind that even at these rates MFIs cannot reach the poorest of poor. One of the most efficent (SKS) MFIs charges 26% and it may not be possible for others to reduce their costs to this extent.
The need of the hour is innovation in the business of micro credit. But there is hope, only recently has micro-fin become a hot debate topic around the world and attracting talent in some of the top B Schools. ISB has a full time elective on microfinace.
Problems of micro-fin are many fold in India (as in any other state). Lack of information leads to adverse selection and difficulty in monitoring leads to moral hazard. Both of these added to the problem of limited liability of borrowers and high transaction costs. The need of the hour is to create innovative products that make the process efficient reducing the risks ie costs associated with the small loans