RBI proposal to remove cap on interest rates for micro-lenders

The Regulator, Reserve Bank of India has proposed a swing of measures to protect micro-finance borrowers from over-indebtedness in order to enable competitive forces to bring down the interest rates.

• In a consultative document released, RBI has proposed to remove the ceiling on interest rates for micro-finance lenders, among other key measures.
• Currently, the margins for NBFC MFIs are capped at 12% over and above its cost of funds. Similarly, RBI has suggested not to charge any pre-payment penalty from borrowers. It said there should be no requirement of collateral for giving loans.
• Further RBI has advocated a greater flexibility in the frequency of repayments for all micro-finance loans. Among other key measures, RBI has proposed to link the loan amount to household income in terms of debt-income ratio.
• According to RBI, in view of low savings of these households, at least half of their income should be available to meet their other expenses.
• Regulator further adds that the existing loans to the households which are not complying with the limit of 50% of the household income, shall be allowed to mature.
• It has also proposed to do away with two lender exposure rules for a borrower. Currently, not more than two NBFC-MFIs can lend to the same borrower as per RBI’s regulations.
• The central bank also observed that all lenders tend to charge high interest rates in line with rates charged by NBFC-MFIs. Ultimately, the borrowers are deprived of the benefits from enhanced competition as well as economy of scale, even in a falling interest rate regime.
• The prescribed ceiling on lending rate for NBFC-MFIs has had an unintended consequence of not allowing competition to play out and most lenders have similar levels of pricing.
• The regulator has proposed to provide a fact sheet on pricing to the borrower by the lending institutions for maintaining transparency.
• RBI authorities add that the suggested framework in the consultative document is intended to be made applicable to the micro-finance loans provided by all entities regulated by the Reserve Bank. It is aimed at protecting borrowers of such loans from over-indebtedness as well as enabling competitive forces to bring down the interest rates by empowering the borrowers to make an informed decision.

Courtesy: Financial Express dt 15^th June 2021