The Reserve Bank of India (RBI) has proposed a new regulatory framework for microfinance institutions (MFIs) that includes capping the outflow on account of repayment of loan obligations of a household to a maximum of 50 per cent of the household income and no pre-payment penalty or requirement of collateral, along with greater flexibility of repayment frequency for all microfinance loans.
In a consultation document on MFI regulations, while the RBI has suggested a common definition of microfinance loans for all regulated entities, it has not fixed any ceiling on interest rates. “Microfinance loans should mean collateral-free loans to households with annual household income of Rs 1,25,000 and Rs 2,00,000 for rural and urban/semi urban areas, respectively. For this purpose, ‘household’ means a group of persons normally living together and taking food from a common kitchen,” the RBI said.
Even though the determination of the actual composition of a household should be left to the judgment of the head of the household, more emphasis should be placed on ‘normally living together’ than on ‘ordinarily taking food from a common kitchen’, it said. The RBI has mooted capping the payment of interest and repayment of principal for all outstanding loan obligations of the household as a percentage of the household income, subject to a limit of maximum 50 per cent.
There are 197 MFIs with a loan outstanding of Rs 2,27,942 crore. Of this, 15 banks account for Rs 93,432 crore, 86 NBFC-MFIs Rs 70,196 crore and 8 small finance banks Rs 42,689 crore.
As per the RBI, there should not be any pre-payment penalty and disclosure of pricing related information should be in a standard simplified fact-sheet. Minimum, maximum and average interest rates charged on microfinance loans should be displayed, it said.
The RBI has not proposed any specific interest rate ceiling. “The board of each NBFC-MFI should adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances,” the RBI said.
It has proposed withdrawal of some of the guidelines presently applicable to only NBFC-MFIs, including stipulations related to sub-limits on loan amount (Rs 75,000 in first cycle, exclusion of loans towards education and medical expenses from overall limit), tenure (minimum tenure of 24 months for loans above Rs 30,000) and purpose (minimum 50 per cent of loans for income generation activities). It has also mooted the withdrawal of two-lender norm for lending by NBFC-MFIs and all pricing related instructions.