Consultative Document on Regulation of Microfinance by RBI

  • IASbaba
  • June 25, 2021
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Consultative Document on Regulation of Microfinance by RBI

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.

Pic courtesy: Business Standard

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