RBI’s Propsals for Microfinance Institutions(MFIs) (GS 3, Economics, The Hindu, Indian Express)

RBI’s Propsals for Microfinance Institutions(MFIs) (GS 3, Economics, The Hindu, Indian Express)

Background: During 1990s it was many scheduled commercial banks either directly or via Non-governmental organisations, used to give micro-loans to rural poors especially women self-help groups. But with time several for-profit financial agencies such as MFIs and other NBFCs emerged given the fact that there was  lack of regulation and scope of high profit. There were widespread malpractices of mfi is for example Bandhan and SKS by the middle of the 2000s. We witnessed a crisis in some states like Andhra Pradesh arising out of the unregulated rapid expansion of microlending for-profit agencies. This crises led the RBI to review the matter. A new regulatory framework of NBFC­MFIs, based on the recommendations of the Malegam Committee, was introduced in December 2011. A few years later RBI permitted in a new type of  private bank, known as self-finance banks (SFBs) with the goal of taking banking activities To the answer and underserved sections population.

Story: RBI, in June 2021 published a consultative document on the regulation of microfinance. The declared objective of this regulation is to promote financial inclusion and create better competition among banks. In this document, RBI has proposed to lift the cap on the interest rate on loans given by microfinance institutions. Other proposals are to consider micro-loans as Collateral free to households with an annual household income of Rs 1.25L to Rs. 2.0L. 

The capping on interest rate is seen as biased against one lender NBFC-MFI among many others like commercial bank small finance banks and other NBFCs. RBI has proposed that the governing Board of each agency shall determine the rate of interest on the presumption that competitive forces will bring down the interest rates. Does RBI has basically Proposed to deregulate the the interest rate charged by private microfinance agencies. These micro-loans largely goes to rural poor especially rural women Groups. 

The ‘maximum rate of interest rate, according to current guidelines, charged by an NBFC­-MFI shall be the lower of the following: the average base rate of the five largest commercial banks multiplied by 2.75’;or the cost of funds plus a margin of 10% for larger MFIs (a loan portfolio of over ₹100 crore) and 12% for others. 

RBI in June 2021 announced that the average base rate was 7.98%. The average interest rate charged on microfinance by Small Finance Banks (SFBs) and NBFC-MFIs was between 22% and 26%, as per their official record on their website, roughly around three times the base rate. 

Microfinance is becoming increasingly crucial for poor households in rural India, especially among rural women groups as these micro-loans are collateral-free or unsecured. It means no collateral is to be kept with lenders. It is of significant important importance for poor peasants and wage workers. But this microfinance loans are generally used  to meet personal and day to day consumption needs like marriage, house repairing etc. and never for productive activity. 

Concern: The interest rate charged on micro-loans by private microfinance agencies Is reported at 22% to 26% year. This is very high in comparison to Interest rate of public sector bank cooperative or primary agricultural credit societies. Primary agricultural credit societies give crop loans at zero interest rate if payment is done in 8 months. Kisan credit card loans from banks charge 4% per annum (Interest rate of 9% with interest subvention of 5%) if we paid in 12 months. Scheduled commercial banks give loans at a at an interest rate of 9% to 12% year. RBI has already recognised that the interest rate charged by private Agencies on microfinance is the maximum permissible, which Cannot be considered as cheap loan from any parameter. The justification of the high-interest rate by MFIs is given as high actual cost of funds. 

While recovering these loans, the bank agents regularly visit the borrower’s residence and collect the EMIs at their doorstep. It is again violating the RBI guideline which prohibits the  recovery at the borrowers residence. Here it is important to note that it shift in digital transaction is serving only sanction of loans but repayment still is entirely done in cash.  Borrowers sometimes complain that debt collectors do not behave professionally. They use bad language in loud voice and shaming them in front of their neighbours. 

The fact that these NBFC-MFIs are well regulated and are earning huge profits has helped the recent phase of growth in financial services. Lending by small finance banks to NBFC-MFIs has been recently including in Priority Sector Lending. The cost of fund for NBFC-MFIs was lowered post-covid-19, but with no additional restriction on the interest rate. 

Way Forward: The deregulation of micro-loans and the removal of the cap on the interest rate as proposed in the said consultative document can lead to affect the polls more. It can lead to further privatisation of rural credit and can reduce the share of direct and Chief credit from banks leaving the poor  borrower at the mercy of Financial agencies. Women borrowers are at larger stake  when private financial agencies go unregulated. It is a time widespread Post-pandemic distress among the working poor and they need help In terms of strengthening the public sector commercial banks and the regulation of private financial entities. pierce the corporate veil. 

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