RBI to regulate microfinance

Mumbai: The Reserve Bank on Monday proposed a uniform regulatory framework for the microfinance sector, wherein MFIs can provide

collateral-free loans to households at board-determined interest rates. Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income

households.

The Reserve Bank of India (RBI) on Monday proposed to do away with pre-payment penalty, requirement of collateral and provide greater flexibility in repayment frequency for all microfinance loans. For the lenders, the central bank proposed removing the pricing caps on micro loans introduced after the 2010 microfinance crisis.

The proposals are part of a consultative document on uniform regulation for companies engaged in microfinance business released by the central bank. The proposed recommendations aim to ensure a level-playing field between banks, non-banks and microfinance firms, all of which do micro lending but have different regulations.

The suggestions include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income and a board approved policy for household income assessment.

The paper has proposed to align the pricing guidelines for NBFC-MFIs with guidelines for NBFCs, introduce a standard simplified fact sheet on pricing of microfinance loans for better transparency, besides displaying the minimum, maximum and average interest rates charged on microfinance loans on the websites of regulated entities.

At present the maximum interest charged by an NBFC-MFI has to be lower of (i) the cost of funds plus a margin cap of 10 per cent for MFIs with loan portfolio of Rs 100 crore or above and 12 per cent for others; (ii) The average base rate of the five largest commercial banks by assets multiplied by 2.75. The average base rate of the five largest commercial banks is announced by RBI at the end of each quarter, which determines the interest rate for the ensuing quarter. These pricing restrictions were introduced in 2014 by the regulator in line with the Y.H. Malegam committee recommendations.

The current regulations are applicable only to 30 per cent of the microfinance loan portfolio NBFC-MFIs whereas other lenders, which comprise around 70 per cent share in the microfinance portfolio, are not subjected to similar regulatory conditions. The emerging dynamics in the microfinance sector as well as the concerns of customer protection call for a review of the regulations, it said.