Recently, the RBI has laid down regulatory framework for the microfinance loans.
Evolution of Micro Finance Sector in India
- 1992: NABARD's SHG-Bank Linkage program. Banks started lending to Women-led SHGs based upon the money which these SHGs saved in the bank accounts.
- 1992 to 2010: No separate RBI guidelines for the Micro finance sector. Facilitated rapid growth of micro-finance institutions (MFIs). These MFIs operated in regulatory vacuum and hence led to their exponential growth. This phase saw the growth of large sized MFIs such as SKS Microfinance, Spandana etc.
- 2010: Andhra Pradesh Microfinance crisis. MFIs indulged in unethical practices such as charging higher interest rates, adoption of forced recovery techniques, not following due diligence in giving loans etc. Led to suicide by large number of people in the rural areas.
- 2011: Appointment of Malegam Committee on Regulation of MFIs. Committee recommended creation of separate category of MFIs called as NBFC-MFIs. Called upon RBI to lay down comprehensive guidelines.
- 2011-2020
- RBI created separate category of NBFC-MFIs and has laid down comprehensive regulatory framework.
- Some of the MFIs have been merged into Banks while some MFIs have been issued license to operate as small finance Bank
- Bandhan Financial services, which was an MFI earlier, has been issued license for Universal Bank
- Present status: The total micro-finance loans stand at Rs 2.7 lakh crores. The highest share is accounted by the SCBs (40%). The NBFC-MFIs account for 30% of the loans.
Summary of the RBI's recommendations on the regulatory framework for the MFIs
| Criteria | Problems in the Present Framework | Proposed Framework |
| Applicability | RBI's guidelines on microfinance sector are applicable only to the NBFC-MFIs, which account for only 30% of the micro-finance loans. It is not applicable to SCBs, RRBs, Cooperative Banks etc. | Guidelines to be made applicable to SCBs, RRBs and Cooperative banks |
| Definition of Micro finance loan | No Common Definition: RBI’s definition of what constitutes Micro-finance loan is applicable only to NBFC-MFIs | Present definition of Micro-finance loan should be extended to SCBs, RRBs and Cooperative Banks |
| Indebtedness | Present Guidelines: A single borrower cannot borrow from more than two NBFC-MFIs. Problems: Borrowers take multiple loans from SCBs, RRBs, Cooperative banks etc. leading to over borrowing. Puts strain on household finances for repayment of principal and interest | Presently, there is a limit on household borrowings which cannot exceed Rs 1.25 lakh per borrower. Rather than having uniform limit, there is a need to have a limit which is based on the household income. Borrowers should not be allowed to borrow more than 50% of their income. |
| Interest Rate | Present Guideline: The ceiling on the interest rate by the NBFC-MFIs based upon the formula given by the RBI. (No need to know the formula for UPSC Exam) Problem: Interest rate applicable only on 30% of the loans given by NBFC-MFIs. Not applicable to SCBs, RRBs etc.Fixing of ceiling on the interest rates has hampered competition among the NBFC-MFIs | Interest rates on the micro-finance loans should be left to the discretion of the individual Banks. (With suitable safeguards to ensure that they don’t charge higher interest rates)RBI feels that this will promote competition among the Banks and help us in bringing down the interest rates on the loans. |
| Collateral free loans | Presently, applicable only to NBFC-MFIs | Must be extended to SCBs, RRBs and Cooperative Banks |
RBI’s guidelines on Microfinance sector
- In 2022, based upon the above recommendations, the RBI has introduced new guidelines for the microfinance sector
- Applicability: All Commercial banks (Including RRBs, Small Finance Banks and Local Area Banks) + Cooperative Banks + NBFCs (NBFC-MFIs and Housing Finance Companies).
- Definition of Microfinance loan:
- Collateral-free loan given to a household having annual household income up to Rs 3 lakhs.
- Given irrespective of end-use and mode of disbursal (either through Physical or digital channels)
- Flexibility of repayment as per the borrowers’ requirement.
- Limit on Loan Repayment Obligation: Loan repayment obligation should not be more than 50% of the monthly household income.
- Pricing of loans: Earlier, the Commercial Banks were given a free hand to fix interest rates on microfinance loans. However, RBI used to fix a ceiling on the interest rates on the loans given by NBFC-MFIs.
- Now, the RBI has given free hand to all entities to fix their own interest rates on micro-finance loans. However, at the same time the RBI has highlighted that interest rates and other charges/ fees on microfinance loans should not be usurious and shall be subjected to supervisory scrutiny
RBI's guidelines for the NBFC-MFIs
- MFI is defined as a non-deposit taking NBFC that fulfils the following conditions:
- Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the Northeastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore).
- At least 75% of its loans should be microfinance loans.