Microfinance: Here’s how this RBI step is going to benefit borrowers

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The Reserve Bank of India’s step to revise the regulatory framework for microfinance is going to benefit the borrowers a great deal by saving them from over indebtedness.

One of the most frequent problems of the small borrowers was that they would end up incurring a lot of debt from a number of lenders who would often prey on their gullibility and prompt them into taking loans that they cannot service.

Eligibility

Under RBI guidelines, a microfinance borrower has an annual household income not exceeding Rs 1.25 lakh for rural sectors and Rs 2 lakh for urban and semi-urban regions.

RBI has put the ball on the court of the lenders. The onus is on the lender to assess the household income of the borrower.

50% of income

No lender can burden any borrower with a loan the repayment of which would consume more than 50% of the household income of the borrower.

“Considering the low savings of these households, at least half of their income should be available to meet their other expenses. This is even more critical for the households at lower level of the prescribed income threshold,” the central bank said.

Creditworthiness

To encourage regular repayment habits, in future the creditworthiness of borrowers would be assessed separately and two neighbours having the same income profile in the same village might be charged different interest rates.

Information about loans and interest rates would be given on a single sheet in a language and format that are easy to grasp.

Concerns underscored

The following points were mentioned with particular emphasis in the consultative document that RBI has released on June 14: Capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, a Board approved policy for household income assessment, no pre-payment penalty; no requirement of collateral; and greater flexibility of repayment frequency for all microfinance loans.

“Small borrowers are increasingly able to get multiple loans from several lenders, contributing to their over-indebtedness which, then, can potentially get manifested into coercive recovery practices. This compromises the essential objective of protection of small borrowers enshrined in the NBFC-MFI regulations which do not permit more than two NBFC-MFIs to lend to the same borrower,” RBI said.

Prepayment

RBI has also thought about protecting borrowers from prepayment penalties. “As a measure of customer protection, microfinance borrowers of all REs shall be provided with the right of prepayment without attracting penalty, as is the case for NBFC-MFIs. Further, microfinance borrowers of NBFC-MFIs are permitted to repay weekly, fortnightly or monthly instalments as per their choice,” RBI said.