Reserve Bank Releases Consultative Document On Regulation of Microfinance

The Reserve Bank Of India (RBI) has released Consultative Document on Regulation of Microfinance. In the Statement on Developmental and Regulatory Policies dated February 5, 2021 released with the fifth Bi-monthly Monetary Policy Statement for 2020-21, the Reserve Bank of India had announced that a consultative document will be issued for harmonising the regulatory frameworks for various regulated lenders in the microfinance space. Accordingly, the Consultative Document on Regulation of Microfinance has been released. The suggested framework in the Consultative Document is intended to be made applicable to the microfinance loans provided by all entities regulated by the Reserve Bank and is aimed at protecting the microfinance borrowers from over-indebtedness as well as enabling competitive forces to bring down the interest rates by empowering the borrowers to make an informed decision. The key proposals of the Consultative Document 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, a Board approved policy for household income assessment, no pre-payment penalty; no requirement of collateral; and greater flexibility of repayment frequency for all microfinance loans, 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 and display of minimum, maximum and average interest rates charged on microfinance loans on the websites of regulated entities.

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