RBI aims to tackle microloan burden with new MFI rules
The Reserve Bank of India (RBI) on Monday suggested capping repayment outflows to half the annual earnings at low-income households, seeking to strengthen the microloan framework and protect millions of vulnerable borrowers from potentially coercive recovery practices. This repayment is a part of slew proposals to revamp the regulations on microfinance,which are very crucial to bringing the bottom of the pyramid within the ambit of formal financing .
The guidelines will be lender agnostic while it is proposed to do away with an interest rate cap on microloans, at present applicable only to pure-play microfinance institutions,said by RBI
Suggestions put forward by a central bank
consultative papers have come over a decade after the Malegam Committee report, which laid down the platform for microfinance regulation. The proposals include a collateral-free loans system and a complete waiver on prepayment penalties.
Their main objective is to raise concerns regarding the over-indebtedness of microfinance borrowers and to enable the market mechanism to bring the interest rates downward in the microfinance sector.
Presently , the microfinance regulatory framework applies only to NBFC-MFIs,
It controls about 30percent of the 2.75lakh crore market. The regulatory curbs do not apply to the rest. As a result of which small borrowers are getting multiple loans ,which is contributing to over indebtedness.That potentially is exposing them to coercive recovery practices, RBI said.This compromises the essential objective of protection of small borrowers enshrined in the NBFC-MFI regulations which do not permit more than two NBFC-MFIs to lend to the same borrower.”
RBI has proposed to resolve issues of regulatory arbitrage based on legal form and bring in parity within all microfinance lenders. RBI believes that considering the low savings of these households half of the savings could be available to meet their other expenses. So Accordingly, it has suggested payments of interest and repayments of principal for all outstanding loans of the household at any point in time shall be capped at 50% of the household income. Therefore the linking of
borrowing household income may reduce credit flow to an individual borrower, people familiar with the matter said.