Microfinance institutions (MFIs) might be allowed to set interest rates guided by a board-approved policy, under a Reserve Bank of India (RBI) proposal to review the regulatory framework governing them.
In a consultative document released on Monday, RBI has proposed to remove the ceiling on interest rates for micro-finance lenders, among other key measures.
“Non-banking financial company (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. However, while doing so, they should ensure usurious interest rates are not charged,” RBI said in its Consultative Document on Regulation of Microfinance.
Regulations Across Categories Of Microlenders
On February 5, the RBI signalled the need for a framework that applies uniformly to all regulated lenders in the microfinance space.
While commercial banks, small finance banks and NBFCs, investment and credit companies have been scheduled in the micro-lending space, the regulatory focus has largely been on those registered as NBFC-MFIs.
The discussion paper intends to facilitate a review of the applicable regulatory framework for microfinance activities undertaken by all regulated entities, RBI said.
Microfinance Lenders To Transparently Set Interest Rates
Industry experts said this proposal reflects the regulator’s faith in the ability of microfinance lenders to transparently set interest rates.
“RBI has reposed faith in the maturity of the microfinance sector with this step. This is a forward-looking step where the responsibility is of the institution to fix a reasonable interest rate on transparent terms,” said P. Satish, executive director of Sa-Dhan, an industry body comprising 227 MFIs.
Microlenders at present have limited freedom to set interest rates.
RBI believes this rate ceiling also has had an unintended consequence of creating a prescribed benchmark for other microlenders. On other hand, Borrowers are deprived of the benefits of enhanced competition and economy of scale even under a falling interest rate regime, it said.
New Framework Suggests
The new framework suggests a common definition of microfinance loans uniformly applicable to all regulated entities:
- It will ensure target borrowers are identified with an element of certainty, irrespective of the type of lenders.
- The maximum allowable level of debt for microfinance borrowers must apply to all regulated entities.
- The current restriction that no more than two NBFC-MFIs can lend to the same borrower will be lifted.
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