Consultative Document on Regulation of Microfinance by RBI
Part of: GS Prelims and GS -III – Economy
- 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.
- 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