RBI suggested the uniform regulatory structure for MFIs

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The RBI on Monday released an advisory document on the regulation of microfinance institutions and proposed a uniform regulatory structure for the microfinance sector, wherein MFIs can provide collateral-free loans to households at board-determined interest rates.

Microfinance is a type of financial service that provides small loans and other financial services to poor and low-income households. The main reason behind such a proposal by the central bank includes the general definition of microfinance loans for all the regulated entities, capping the outflow on the account of repayment of loan obligations of a household to a percentage of the household income & a board-approved policy for the household income assessment.

Key takeaways from the RBI’s Advisory document

A common set of rules for the micro loans, irrespective of the lenders who give them whether it is Banks, NBFCs, or MFIs. The RBI on Monday suggested to lift the interest rate cap on MFIs and said that all the micro loans should be regulated by a common set of guidelines irrespective of who gives them.

Micro loans to be capped at 50% of the household income to avoid indebtedness,  proposing a debt-income ratio cap, the RBI said that the loan should be given in such a manner that the payment of interest & repayment of principal for all outstanding loans of a household at any point of time should not cross 50% of the household income. Regarding this debt-income cap, RBI felt would prevent the need for having the multiple restrictions being faced by the MFIs only and would promote hassle-free loan procedures.

Interest rate cap on MFIs to go, multiple lending to be allowed, the RBI wants to free MFIs from such obligations and create a fair play game, there would be no ceiling prescribed for the interest rates, but while doing so MFIs should ensure that usurious interest rates are not charged.

All lenders have to spell minimum, average, and maximum rates, all regulated entities must display the minimum, maximum and average interest rates charged on them, on microfinance loans, this would be subject to the RBI’s supervisory scrutiny.

A common definition of microfinance loans for all regulated entities, under the RBI rules for MFIs microfinance borrower is identified by the annual household income not exceeding ₹1.25 lakh for rural and ₹2 lakh for urban and semi-urban areas. The RBI said the same criterion should be extended to all the regulated entities for the common definition.

No prepayment penalty, no requirement of the collateral, & greater flexibility of repayment frequency, while all the entities have to permit the borrowers to repay weekly, semi-weekly or monthly installments at the choice of borrower’s. This is to ensure that the repayment pattern is designed to suit the borrower’s repayment capacity and preferences.

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