RBI releases discussion paper for MFIs, banks parity

Sanjay JogUpdated: Monday, June 14, 2021, 08:21 PM IST
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A Reserve Bank of India (RBI) consultative paper on microfinance has made a case for parity between banks and micro-financial institutions (MFIs). The suggestions when operationalised will give freedom to MFIs to price loans and more flexibility in doing business.

The total exposure of banks and MFIs to the sector is Rs 2.3 trillion with the former having the lion’s share of nearly Rs 1.37 trillion — which includes small finance banks (SFBs) as well.

The paper comes into public domain at a time when the coronavirus pandemic has affected collections across the country; and has affected the micro-finance business. It is surmised that with the ensuing assembly polls in Uttar Pradesh, Punjab and Gujarat, the central bank’s suggestions once implemented could provide relief to small borrowers.

The primary objective is to address the concerns related to the over-indebtedness of microfinance borrowers and to bring in more transparency; and empower borrowers to make an informed decision.

A microfinance borrower is identified by annual household income not exceeding Rs 1,25,000 for rural and Rs 2,00,000 for urban and semi-urban areas. For this purpose, ‘household’ means a group of persons normally living together and taking food from a common kitchen. Even though the determination of the actual composition of a household shall 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.'

Each regulated entity shall have a Board approved policy for household income assessment, 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, periodicity of repayments as per borrowers’ requirements and all-inclusive interest rates charged to the borrowers.

The criteria for exemption of ‘not-for-profit’ microfinance companies will be applicable to those providing collateral-free loans to households with annual household income of Rs 1,25,000 and Rs 2,00,000 for rural, urban and semi-urban areas respectively, provided the payment of interest and repayment of principal for all outstanding loans of the household at any point of time does not exceed 50 per cent of the household income. Besides, these companies are registered under Section 8 of the Companies Act (2013), they do not accept public deposits and have asset size of less than Rs 100 crore.

Pricing by MFIs has come down 3-5 per cent over the years, whereas pricing by banks to MFI borrowers has not reduced despite reduction in secular interest rates. A few prominent banks charge borrowers 24-26 per cent, whereas the maximum lending rate allowed for MFIs is not more than 21.5 per cent due to the 10 per cent over the cost of funds regulation.

Governor Shaktikanta Das had in February this year said the central bank will come out with a consultative document to harmonise the regulatory frameworks applicable to banks, non-banking financial companies; and SFBs.

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