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RBI proposes no interest rate ceiling, no penalty on pre-payment for microfinance sector

The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans.

RBI has sought comments and suggestions from banks, NBFCs including NBFC-MFIs, industry associations and other stakeholders on the consultative document by July 31. RBI has sought comments and suggestions from banks, NBFCs including NBFC-MFIs, industry associations and other stakeholders on the consultative document by July 31.

The Reserve Bank of India (RBI) on Monday released a uniform regulatory framework for microfinance sector, proposing to remove interest rate ceiling for the sector.

"...NBFC-MFIs, like any other NBFC, shall be guided by a board-approved policy and the fair practices code, whereby disclosure and transparency would be ensured. There would be no ceiling prescribed for the interest rate," RBI said in the consultative document issued for regulation of microfinance sector.

However, the lenders should ensure that usurious interest rates are not charged, the RBI said, adding that the intention is to enable the market mechanism to bring the lending rates downwards for the entire microfinance sector.

In its 'statement on developmental and regulatory policies', released on February 5 this year along with monetary policy statement, the central bank said a consultative document will be issued for harmonising the regulatory frameworks for various regulated lenders in the microfinance space.

The RBI has sought comments and suggestions from banks, NBFCs including NBFC-MFIs, industry associations and other stakeholders on the consultative document by July 31.

Microfinance is a form of financial service that provides small loans and other financial services to poor and low-income households. Currently, the RBI's comprehensive regulatory framework is applicable only to NBFC-MFIs, whereas other lenders, which comprise of around 70 per cent share in the microfinance portfolio, are not subjected to similar regulatory conditions.

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 are among the key proposals of the document.

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The RBI has also proposed no requirement of collateral, and greater flexibility of repayment frequency for all microfinance loans.

As per the consultative paper, a microfinance loan would mean collateral-free lending to households with annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh at urban and semi-urban centres.

"As a measure of customer protection, microfinance borrowers of all regulated entities (REs) shall be provided with the right of prepayment without attracting penalty, as is the case for NBFC-MFIs...all REs shall have a board approved policy to provide the flexibility of repayment periodicity to microfinance borrowers as per their requirement," it said.

The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans. They will also be required to disclose pricing related information in a standard simplified fact-sheet.

On pricing related guidelines under Fair Practices Code, the document proposed that the board of each NBFC-MFI shall 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 rate of interest and the approach for gradations of risk and rationale for charging different rate 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," it said.

The rate of interest must be annualised so that the borrower is aware of the exact rates that would be charged to the account, it added. Besides, lenders will also be required to mention the penal interest charged for late repayment in bold in the loan agreement.

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