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Topic in News

Consultative Document on Regulation of Microfinance by RBI

The Reserve Bank of India has issued a Consultative Document on Microfinance Regulation.

It was produced in order to harmonise the regulatory frameworks for various registered microfinance lenders.

It further stated that all microloans, regardless of who provides them, should be governed by a common set of guidelines.

The key proposals of the Consultative Document are

  • All regulated entities must use the same definition of microfinance loans.
  • The Reserve Bank of India has proposed restricting interest and principal repayments for all existing family loan obligations at a proportion of household income, up to a maximum of 50%.
  • A policy for determining household income was approved by the
  • There would be no interest rate ceiling For microloans, there would be no requirement for collateral.
  • There must be no prepayment penalty, and all organisations must allow borrowers to pay in weekly, fortnightly, or monthly payments as they see fit.
  • Alignment of NBFC-MFI pricing rules with NBFC pricing guidelines.
  • To improve openness, a uniform simplified fact sheet on microfinance loan pricing would be introduced.
  • On the websites of regulated businesses, the minimum, maximum, and average interest rates imposed on microfinance loans are displayed.

About Microfinance Institution (MFI)

  • Microfinance is a type of financial service that gives poor and low-income people small loans and other financial services.
  • MFIs are financial institutions that make small loans to persons who do not have access to traditional banking services.
  • Microloans are defined as loans of less than Rs. 1 lakh in India.
  • The distinction between an NBFC-MFI and other NBFCs is that, whereas other NBFCs can operate at a very high level, MFIs only cater to lower social strata with lesser credit needs.

Non-Banking Financial Company (NBFC)

  • NBFC cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs.
  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956.