The Reserve Bank of India (RBI) has proposed a slew of measures to defend micro-finance borrowers from more than-indebtedness and allow competitive forces to bring down the interest prices. In a consultative document released on Monday, RBI has proposed to take away the ceiling on interest prices for micro-finance lenders, amongst other important measures.
Currently, the margins for NBFC MFIs are capped at 12% more than and above its price of funds. Similarly, RBI has recommended not to charge any pre-payment penalty from borrowers. It stated there must be no requirement of collateral for providing loans. The Reserve Bank has advocated a higher flexibility in the frequency of repayments for all micro-finance loans. Among other important measures, RBI has proposed to hyperlink the loan quantity to household revenue in terms of debt-revenue ratio.
“Considering the low savings of these households, at least half of their income should be available to meet their other expenses,” RBI stated in its consultative document on micro-finance. “Existing loans to the households which are not complying with the limit of 50% of the household income, shall be allowed to mature,” the regulator additional stated. It has also proposed to do away with two lender exposure guidelines for a borrower. Currently, not more than two NBFC-MFIs can lend to the very same borrower as per RBI’s regulations.
The central bank also observed that all lenders have a tendency to charge higher interest prices in line with prices charged by NBFC-MFIs. Ultimately, the borrowers are deprived of the rewards from enhanced competitors as effectively as economy of scale, even in a falling interest price regime.
The prescribed ceiling on lending price for NBFC-MFIs has had an unintended consequence of not enabling competitors to play out and most lenders have comparable levels of pricing.
The regulator has proposed to provide a truth sheet on pricing to the borrower by the lending institutions for sustaining transparency.
The recommended framework in the consultative document is intended to be made applicable to the micro-finance loans offered by all entities regulated by the Reserve Bank. It is aimed at safeguarding borrowers of such loans from more than-indebtedness as effectively as enabling competitive forces to bring down the interest prices by empowering the borrowers to make an informed choice, RBI stated.
The comments and recommendations on the consultative document can be sent by July 31, 2021.