RBI liberalises Norms for Microfin Industry

The RBI on Monday revamped its norms for microfinance, making them uniform across lenders, removing the ceiling on interest rates and hiking the cap on family income for MFI loans.

According to an RBI circular, any collateral-free loan given to a household with an annual income of up to Rs 3 lakh is an MFI (microfinance institution) loan. The circular also allows the lender to put in place a boardapproved policy for pricing of the loans as long as they were not usurious. In the past, the central bank had linked lending to costs.

The norms said that lenders could not have a lien on deposit account for loans disbursed and boards could approve the policy for flexibility in repayment frequency and income assessment. Lenders cannot provide loans where the loan repayment is at 50% of monthly household income or more. If there are any existing loans where the outgo is above 50%, the loans will be allowed to mature. The RBI also does away with the limit on processing fees and interest removed. “The harmonised regulations will usher in a new beginning for the microfinance sector where a common regulatory framework will apply to all regulated entities (REs) of the RBI. Besides creating a level playing field, the framework will address issues of overindebtedness and multiple lending which were of paramount concerns for the sector,” said Alok Misra, CEO & director, MFIN, an association of micro lenders.

According to Udaya Kumar Hebbar, CEO at CreditAccess Grameen, the new regulations will pave the way for increased competitiveness. “The revision of the income cap to Rs 3 lakh will expand the market opportunity and interest rate cap removal will promote risk-based underwriting. This reflects the confidence shown by the central bank in the ability of MFIs to responsibly cater to the bottom of the pyramid,” he said.

CS Ghosh, MD & CEO of Bandhan Bank, which was originally a microlender said that the guidelines will deepen the penetration of microfinance in India. “The latest guidelines are a strong reflection of the maturity that the microcredit industry has reached in India; and it will help harmonise the regulatory framework for different types of lenders, encourage healthy competition and enable customers to make an informed choice regarding their credit needs,” said Ghosh.