Mumbai, March 14 (Bureau) Microfinance Institutions Network (MFIN), the association for microfinance entities, on Monday welcomed the harmonized regulations announced by the RBI for the sector where common regulatory framework will be applicable to all entities, banks, NBFCs, and MFIs, saying it will create a level playing field for all the lenders. In its new guidelines issued today, the RBI has defined a microfinance loan as a ‘collateral-free’ loan granted to a household with an annual household income of up to Rs 3 lakh, which currently is Rs 125,000 for rural and Rs 200,000 for urban and semi-urban areas. The new framework, called the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, which will be effective from April 1, 2022, has also removed the pricing cap on NBFC-MFIs.
The much-awaited harmonized regulations come subsequent to the consultative document released by the RBI in June 2021 which sought to review the applicable regulatory framework for microfinance activities undertaken by all regulated entities of the Reserve Bank and address the concerns related to the over-indebtedness of microfinance borrowers, among others. Terming the new framework as “extremely comprehensive”, MFIN CEO and Director Alok Misra said the harmonized regulations will usher in a new era/beginning for the microfinance sector where a common regulatory framework will be applicable to all regulated entities (REs) of the RBI. “Besides creating a level playing field, the framework will address issues of over indebtedness and multiple lending which were of paramount concerns for the sector. More importantly, the RBI has taken a prudent view of the bottlenecks that presented in credit delivery, addressing each of them,” he said. Misra further said the revision of household income is a very progressive move with far reaching implications as more needy, low-income households will now come into the purview of accessible credit, taking us closer to our financial inclusion goal.
The RBI has also taken into consideration MFIN plea to relax the 85 per cent qualifying asset criteria and now fixed it at 75 per cent of the net assets, which will allow NBFC-MFIs to diversify their portfolio as also provide larger loans to mature clients. As per the new guidelines, boards of microfinance institutions will have the freedom to determine the interest rates on loans. “Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank,” the RBI said. RBI also directed all the lenders’ to adopt flexible repayment policies to meet borrowers’ needs. The RBI has also stipulated all REs to use comprehensive credit bureau report in lending decisions as well as elucidated on transparent pricing and fair practices, keeping the client centricity as key principle of microfinance. The RBI has also placed an important role for the SRO (self regulatory organization) to build a responsible microfinance ecosystem. “We thank the RBI for recognising our role in monitoring and maintaining discipline on ground and in ensuring that the spirit of customer protection – that is intrinsic to RBI frameworks – is safeguarded. Our work has become even more crucial now as we navigate the road ahead which will be exciting with the changing ecosystem and the new regulations that lay focus on customer protection, risk management, governance, transparency, and compliances,” Misra added.