Current Affairs

UPSC RBI’s REGULATORY FRAMEWORK FOR MICROFINANCE LOANS - English

RBI’s REGULATORY FRAMEWORK FOR MICROFINANCE LOANS

Why in News?

Recently, the Reserve Bank of India (RBI) allowed Microfinance Institutions(MFI) the freedom to set interest rates they charge borrowers

About

Microfinance Loan - The RBI revised the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh.

  • Earlier, the upper limits were Rs.1.2 lakh for rural borrowers and Rs.2 lakh for urban borrowers.        
  • There shall be no prepayment penalty on microfinance loan.
  • Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.
  • Any change in interest rate or any other charge shall be informed to the borrower well in advance and these changes shall be effective only prospectively.
  • Regulated Entities would have to put in place a mechanism for identification of the borrowers facing repayment-related difficulties.
  • It will be applicable to All Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks) excluding Payments Banks. Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks. All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies).

Advantages of Microfinance Institutions(MFI)

  • Expanding Opportunities
  • Expand markets
  • Increases the competition
  • Financial inclusion
  • Safe the interest of the borrowers

Microfinance Institution –

  • MFI is an organisation that offers financial services to low income populations.
  • MFIs are financial companies that provide small loans to people who do not have any access to banking facilities.
  • These services include microloans, microsavings and microinsurance.
  • Interest rates will be very low when we compared with all  the other banks.
  • Microfinance sector has grown rapidly over the past few decades and currently it is serving around 102 million accounts.
  • NBFC-MFIs in India are regulated by the Non-Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011 of the Reserve Bank of India (RBI).

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