Microfinance institutions drew some sharp raps from the government on Monday in the backdrop of the suicides in Andhra Pradesh linked to the strongarm tactics of MFIs in recovering debts. The prime minister's economic advisory council (PMEAC) chairman C Rangarajan asked the MFIs to " rectify their mistakes" while rethinking their business model.

“The business model of microfinance institutions has to undergo a change,” Rangarajan said on the inaugural day of the Microfinance India 2010 summit in New Delhi.

The senior economist stressed on regulation for the sector, conceding that it was necessary to avoid incidents like the Andhra suicides.

"Formal regulatory systems will have to be put in place...The significant expansion (of financial inclusion) can occur from the banking sector but at the same time there is also the role for microfinance institutions (MFIs),” Rangarajan said.

The seven billion dollar microfinance industry in India runs without any proper regulations. Some parts of the sector are regulated but there is no blanket regulation as such.

With the demands for regulation of the sector growing, the industry representatives also called for an appropriate watchdog policy.

“Regulation has to be appropriate which leads to healthy development of this sector,” Alok Prasad, CEO, microfinance institutions network (MFIN), India said at the conference.

The government has a bill on the same in the pipeline. “We expect a consensus soon (on MFI regulator)...We expect it to be in Parliament in 3-4 months,” K V Eapen, financial services joint secretary to the government of India said at the event.

The high interest rates by some MFId and the suicides dominated most of the discussion at the summit.

The high interest rates charged by the microfinance companies and suicides in Andhra Pradesh were the main highlight of the discussion during the conference. “This conference is good way to introspect and to seek how do we discipline ourselves and change our modalities to the challenges facing at the present time,” Vipin Sharma, CEO, ACCESS Development Services told Governance Now at the sidelines of the summit.

Some industry voices also accused the Andhra Pradesh government of high-handedness while dealing with the MFIs in the aftermath of the suicides.

MFIs have been struggling to do business in the state after the government slapped an ordinance on disciplining of the informal lenders.

"The companies are not able to go to half of the villages and even in those villages where they are able to go, there are no full recoveries,” Vijay Mahajan, president of the MFIN told Governance Now.

“There is collective failure of the microfinance sector. If nothing happens in the next two months, people in AP will be forced to go to money lenders,” Brijmohan, chairman, ACCESS Development Services said.