Microfinance institutions may get freedom to price loans

As part of a consultation paper, apex banking regulator RBI has proposed removal of the ceiling on interest rates and instead proposed board-approved policies to determine it.

Published: 15th June 2021 05:42 AM  |   Last Updated: 15th June 2021 08:23 AM   |  A+A-

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For representational purpose. (File Photo | PTI)

By Express News Service

NEW DELHI: The Reserve Bank of India (RBI) has floated a ‘Consultative Document on Regulation of Microfinance’ in a bid to bring a uniform regulatory framework for microfinance institutions (MFIs).  

As part of the consultation paper, the banking regulator has proposed removal of the ceiling on interest rates and instead proposed board-approved policies to determine it.

This, RBI said, is expected to address concerns related to the over-indebtedness of borrowers and bring the interest rates down. 

“NBFC-MFIs, like any other NBFC (non-banking financial company), shall be guided by a board-approved policy and the fair practices code, whereby disclosure and transparency would be ensured. There would be no ceiling prescribed for the interest rate. However, while doing so they should ensure that usurious interest rates are not charged,” RBI said in its paper.

The board of each MFI can create an interest rate model, considering the cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances, it added.

The freedom in pricing will be a departure from the current rules. At present, microfinance institutions are required to use the lower rate between these two rates as the ceiling: It should either be cost of funds plus a margin of 10 percentage points for NBFC-MFIs with loan portfolio exceeding Rs 100 crore and 12 percentage points for others or 2.75 times of the average base rate of the five largest commercial banks.

“The rate of interest and the approach for gradations of risk and rationale for charging different rates of interest to different categories of borrowers shall be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter,” it added.  

It also suggested that the interest rate must be an annualised rate so that the borrower is aware of the exact rates that would be charged to the account. 

Currently, loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower. The paper also proposes periodicity of repayments. 

The regulator has sought comments from stakeholders on the paper by July 31, 2021.


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