"The microfinance institutions (MFIs) have emerged as an important means of financial inclusion," Pranab Mukherjee told lawmakers as he presented the government's budget for the next financial year starting April 1.

"Creation of a dedicated fund for providing equity to smaller MFIs would help them maintain growth and achieve scale and efficiency in operation," he added.

The India Microfinance Equity Fund will be created with state-run Small Industries Development Bank of India.

The seven-billion-dollar microfinance sector was until recently hailed as a saviour of India's poor for providing loans averaging 250 dollars to millions of borrowers who are unable to get credit from mainstream banks.

But the micro-financiers' surging profits, charges of arm-twisting debt collectors and interest rates of over 30 percent have led to mounting controversy with some critics accusing the sector of greed.

Since the backlash, many commercial banks have restricted lending to microfinance institutions, leading many lenders to complain they risk going out of business.

An Indian central bank panel recommended nationwide regulation of the microfinance sector in January, and suggested that interest rates on loans be capped at 24 percent a year, with loans limited to 25,000 rupees per borrower.

The panel's report was commissioned after the southern state of Andhra Pradesh, a hub of micro-credit activity, took steps last October to crack down on microfinance firms' operations in a bid to stop alleged exploitation.