Consultative Document on Regulation of Microfinance by RBI

IASbaba

June 25, 2021

Part of: GS Prelims and GS -III – Economy

In news

RBI has released a Consultative Document on Regulation of Microfinance.
It is released for harmonising the regulatory frameworks for various regulated lenders in the microfinance space.
It also said that all micro loans should be regulated by a common set of guidelines irrespective of who gives them.

The key proposals of the Consultative Document are

A common definition of microfinance loans for all regulated entities.
RBI has mooted capping the payment of interest and repayment of principal for all outstanding loan obligations of the household as a percentage of the household income, subject to a limit of maximum 50%.
A Board approved policy for household income assessment.
There would be no ceiling prescribed for the interest rate. There would be no collateral allowed for micro loans.
There can be no prepayment penalty, while all entities have to permit the borrowers to repay weekly, fortnightly or monthly instalments as per their choice.
Alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs.
Introduction of a standard simplified fact sheet on pricing of microfinance loans for better transparency.
Display of minimum, maximum and average interest rates charged on microfinance loans on the websites of regulated entities.

About MicroFinance Institution (MFI)

Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households.
MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.
In India, all loans that are below Rs. 1 lakh can be considered as microloans.
The difference between an NBFC-MFI and other NBFC is that while other NBFCs can operate at a very high level, MFIs cater to only the smaller level of social strata, with need of smaller amounts as loans.