Mostly Welcome Microfinance Norms – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/mostly-welcome-microfinance-norms/articleshow/83790207.cmsSynopsis

The RBI paper now seeks to streamline and update microfinance regulation across all regulated entities, which makes perfect sense. The rates of interest and the system of gradation of risks are to be disclosed on the website of the microfinance entities and published in the relevant newspapers. No ceiling is prescribed for the interest rate, but the regulated entities are to ensure that no usurious rates are charged. The extant rules mandate a 4% range between the minimum and maximum interest rate.

RBI has put out a timely consultation on regulation of microfinance, which proposes to revamp prudential norms, boost transparency and disclosure with a Fair Practices Code, and also seeks to liberalise interest rate regulation. The objective is to address over-indebtedness among borrowers, and duly enable competitive market forces to bring down interest rates.

The microcredit sector is large, with outstanding credit at over Rs 2.27 lakh crore. It makes credit available to low-income households through a variety of institutional channels, spanning scheduled commercial banks, small finance banks, regional rural banks, business correspondents, self-help groups, cooperative banks, non-banking financial companies (NBFCs) and microfinance institutions (MFIs) registered as NBFCs. Microfinance was lightly regulated, but the Andhra Pradesh microfinance crisis of 2010 led to the Y H Malegam committee regulatory framework that was made applicable to NBFCMFIs. This segment constitutes 30% of all microfinance lending.

The RBI paper now seeks to streamline and update microfinance regulation across all regulated entities, which makes perfect sense. The rates of interest and the system of gradation of risks are to be disclosed on the website of the microfinance entities and published in the relevant newspapers. No ceiling is prescribed for the interest rate, but the regulated entities are to ensure that no usurious rates are charged. The extant rules mandate a 4% range between the minimum and maximum interest rate.

The capping of loans at 50% of household income does not make sense. A vegetable seller who makes a daily margin of 10% might need to routinely take overnight loans of `10,000 to earn `1,000 a day. Do not stop that.

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