and pricing. It means that the RBI feels institutions have matured to such a level that they will be able to make decisions that keep the interest of borrowers in mind. This is a watershed moment as far as the regulatory framework for the microfinance sector is concerned,” Satish said.
Satish said capping the debt-income ratio was a “scientific way” of calculating the indebtedness, and “this itself will restrict the amount that can be given as loans to each borrower by a lender”.
Alok Misra, CEO & director, MFIN, said, “The focus on responsibility of boards for promoting good governance and sound operational policies is a welcome step. We expect the microfinance sector to witness a paradigm shift, triggering a huge fillip to the cause of financial inclusion when it matters the most, especially in these challenging times.”
MFIs are currently barred from lending
to a customer a third loan if he or she has already taken loans from two MFIs. However, there are no such restrictions for banks, which go ahead and give further loans, trapping the borrower in indebtedness.
The RBI sought to lift this cap altogether as a cap on indebtedness negates the impact of such multiple lending.
Under the RBI rules for MFIs, a microfinance borrower is identified by annual household income not exceeding Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas. The RBI said the same criterion should be extended to all regulated entities for the purpose of the common definition.
“A common definition of microfinance loans for all regulated entities will ensure a level playing field, making it entity-agnostic,” Misra said.
“The intention of the proposed regulation is to ensure that the household is not strained,” the central bank said in its paper. Considering the low savings of these households, at least half of their income should be available to meet their other expenses, it said.
Besides, a debt-income cap of 50 per cent would also mean that earlier restrictions on MFIs such as having a maximum loan limit of Rs 1,25,000, and 24 instalments for any loan above Rs 30,000 can be dispensed with.
This threshold would be applicable from the date of introducing the regulation, but the existing loans that are over 50 per cent of the household income will be allowed to mature. However, no new loans can be given till the limit is complied with.
There would be no collateral allowed for micro loans. All the entities must provide timely and accurate data to credit bureaus.
There can be no prepayment penalty, while all entities have to permit the borrowers to repay weekly, fortnightly or monthly instalments as per their choice. This is to ensure that the repayment pattern is designed to suit the borrower’s repayment capacity and preference.
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