RBI proposes to lift interest rate cap on microfinance institutions

The Reserve Bank of India (RBI) recently proposed to lift the interest rate cap on microfinance institutions (MFIs), and said all micro loans should be regulated by a common set of guidelines irrespective of who gives them.

Proposing a debt-income ratio cap, the RBI said the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income.

Key Highlights

• This debt-income cap, the RBI felt, would obviate the need for having multiple restrictions being faced by MFIs only. 
• There are no micro loans-specific structures for lenders such as banks and non-banking financial institutions (NBFCs), even as they are responsible for extending 70 per cent of the microfinance loans. 
• In a consultative paper on its website, the RBI, therefore, proposed a uniform set of rules for micro loans. This is also because, even as banks have a much lower cost of funds, they charge the same interest rate for such loans as MFIs do, which has become the industry standard, defeating the purpose of such loans. 
• 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.

SOURCE: Business Standard

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