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RBI proposes removing cap on interest rates for micro-lenders

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.

RBI proposes removing cap on interest rates for micro-lenders
The Monetary Policy Committee (MPC) left the repo rate unchanged at 4 per cent while continued with the accommodative stance to revive and sustain growth on a durable basis.

The Reserve Bank of India (RBI) has proposed a slew of measures to protect micro-finance borrowers from over-indebtedness and enable competitive forces to bring down the interest rates. 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.

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. The Reserve Bank 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.

“Considering the low savings of these households, at least half of their income should be available to meet their other expenses,” RBI said in its consultative document on micro-finance. “Existing loans to the households which are not complying with the limit of 50% of the household income, shall be allowed to mature,” the regulator further said. 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.

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, RBI said.

The comments and suggestions on the consultative document can be sent by July 31, 2021.

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