RBI proposes a uniform regulatory framework for microfinance sector, proposes 'collateral-free lending'

The Reserve Bank of India on Monday releases a consultative document on the regulation of microfinance institutions and proposed a uniform regulatory framework for the microfinance sector, wherein MFIs can provide collateral-free loans to households at board-determined interest rates. 

Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households. 

The key proposals of the apex bank include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, and a board-approved policy for household income assessment. 

It also suggests no requirement of collateral and greater flexibility of repayment frequency for all microfinance loans. 

According to the RBI notification, an MFI loan would mean collateral-free lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh at urban and semi-urban centers. 

"The rate of interest and the approach for gradations of risk and rationale for charging different rates of interest to different categories of borrowers shall be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter," RBI said. 

In CLSA’s view, RBI’s proposal on MFIs is an overall positive, it further added that earlier regulations were more strictly defined for NBFC-MFI versus banks and small finance banks. The brokerage said, Indebtedness being linked to EMI/Income of up to 50 per cent is a liberal move. 

While Macquarie mentions that the proposed regulations on MFIs by RBI is much more lenient than what the market expected. It points out that an important difference in the current norm is that these rules are applicable to all regulated entities. 

Currently, the loan is repayable on weekly, fortnightly, or monthly installments at the choice of the borrower. The paper proposes the periodicity of repayments.