Economy

RBI proposes regulatory framework for microlenders

Our Bureau Mumbai | Updated on July 12, 2021

Suggestions include adopting a common household income-linked definition to identify microfinance borrowers

All lenders may be asked to adopt a common household income-linked definition to identify microfinance borrowers, and ensure that at least half of these borrowers’ income is available to meet their other expenses, according to the Reserve Bank of India’s proposed regulatory framework for microfinance activities undertaken by all Regulated Entities.

As per the proposed guidelines, a common definition of a microfinance borrower, as currently applicable to non-banking finance company —- microfinance institutions/ NBFC-MFIs (annual household income not exceeding ₹1.25 lakh for rural and ₹2 lakh for urban and semi-urban areas), will be extended to all REs.

Collateral-free loans to households as defined above will be defined as microfinance loans. To assess household income, it is proposed that income assessment should be carried out at the household level.

Household indebtedness

To address the concerns of over-indebtedness, the framework proposes to link the loan amount to household income in terms of debt-income ratio. The intention of the proposed regulation is to ensure that the household is not strained.

Accordingly, the payment of interest and repayment of principal for all outstanding loans of the household at any point of time shall be capped at 50 per cent of the household income. Existing loans to the households which are not complying with the limit of 50 per cent of the household income, shall be allowed to mature.

However, individual RE may adopt a conservative threshold as per their own assessments and Board approved policy.

As a measure of customer protection, microfinance borrowers of all REs shall be provided with the right of prepayment without attracting penalty, as is the case for NBFC-MFIs, as per RBI’s consultative document on regulation of microfinance.

Since the repayment pattern should be designed to suit the borrower’s repayment capacity/preferences, all REs shall have a Board approved policy to provide the flexibility of repayment periodicity to microfinance borrowers as per their requirement.

Currently, microfinance borrowers of NBFC-MFIs are permitted to repay weekly, fortnightly or monthly instalments as per their choice.

Empower borrowers

In order to empower the microfinance borrowers to make an informed decision, a standardized and simplified one-page disclosure format containing information only on pricing of microfinance loans shall be prescribed for all REs.

This format shall enable the borrowers to compare interest rates as well as other fees associated with a microfinance loan in an easy-to-understand manner.

It will require disclosure of repayments (total as well as periodic) in absolute amount (with further break-up of principal and interest component) rather than only in percentage terms (which are generally misrepresented/ difficult to comprehend).

All REs shall be required to display the minimum, maximum and average interest rates charged by them on microfinance loans.

This information shall also be made part of the returns submitted by the REs to the Reserve Bank and shall be subjected to the supervisory scrutiny.

Guidelines for NBFC-MFIs

The framework proposes to align pricing guidelines for NBFC-MFIs with that prescribed for NBFCs.

In other words, NBFC-MFIs, like any other NBFC, shall be guided by a board-approved policy and the fair practices code, whereby disclosure and transparency would be ensured.

There would be no ceiling prescribed for the interest rate. However, while doing so they should ensure that usurious interest rates are not charged.

The intention is to enable the market mechanism to bring the lending rates downwards for the entire microfinance sector.

Section 8 cos

The framework said it may be prudent to bring Section 8 (non-profit organisation) companies above a certain threshold in terms of balance sheet size (say, asset size of ₹100 crore and above) under the regulatory ambit of the Reserve Bank.

Those Section 8 Companies which meet the asset size threshold for registration, shall be provided six months’ time to comply with registration requirements including minimum net owned fund (NOF) criterion.

Published on June 14, 2021

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