GS Paper - 3 (Economy)

The Reserve Bank of India has removed the interest rate ceiling on loans offered by NBFC-MFIs to bring them at par with other microfinance lenders including banks as the central bank seeks to put all these lenders on a same regulatory platform. While this move is on an expected line, RBI surprised the market by raising the annual household income level to 3 lakh for classification of microfinance loans.

What

  1. Earlier, the income caps were kept at Rs 1.25 lakh in rural areas and Rs 2 lakh in urban and semi-urban areas.
  2. With this change, unsecured loans offered by several other non-banking finance companies will henceforth be classified as micro loans, industry experts said.
  3. All such collateral free loans, irrespective of end-use, will be considered as microfinance loans.
  4. To protect borrowers from falling into debt-trap -- an issue that keeps haunting the sector, the regulator capped monthly loan repayment of every borrower saying that monthly outflows on account of repayment should not exceed 50% of the monthly household income.
  5. RBI also said that no loan can be linked with a lien on the deposit account of the borrower. There will be no prepayment penalty on microfinance loans.
  6. The harmonized regulations will address the concerns related to the over-indebtedness of microfinance borrowers.
  7. RBI allowed a breather to NBFC-MFIs by reducing the minimum requirement of microfinance loans of total loan assets to 75& from 85% earlier, in sync with the spirit of harmonisation of microfinance regulation for all sorts of lenders.