RBI to review feedbacks on MFI guidelines when needed, says deputy governor Rao

MFi

Feedbacks on guidelines issued for banks and non-bank financiers on microlending have begun coming in and the the Reserve Bank of India (RBI) said those will be reviewed if and when needed.

“The lenders are expected to price the true risk of exposure and the interest rates cannot be disproportionate to the risks. The higher credit losses cater to poor underwriting standards and that's exactly the message we are giving that underwriting standards need to be strengthened and risk is properly priced. We are getting feedback on MFI guidelines and we will review at the appropriate time and see if any revision is warranted at the juncture,” deputy governor M Rajeshwar Rao said in a post monetary policy press conference on October 9.

The RBI had issued the guidelines on March 14, 2022, when it said that microfinance lending for all entities, including banks, NBFCs and microfinance institutions (MFIs) are subject to the same regulations. It said that a microfinance loan is defined by the RBI as a collateral-free loan granted to a household with an annual income of up to Rs 3 lakh. Earlier, the urban household income limit was Rs 2 lakh, while the rural household income limit was Rs 1.6 lakh. The new rule said that all collateral-free loans offered to low-income households, regardless of the end-use and mode of application or processing or disbursal, are considered microfinance loans.

Some NBFC-MFIs have been requesting the regulator to revise the criteria relating to annual household income limit for giving microloans in view of their growing needs of individual borrowers. They want this limit upped from the existing Rs 3 lakh to about Rs 5 lakh.

The central bank had also said that the financial entities should have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirements. They should also have a board-approved policy for the assessment of household income.

The guidelines also mentioned that all banks, NBFCs must provide reasons for the income discrepancy of borrowers, if any. All regulated entities must submit information on the household income of borrowers. The RBI has also said there shall be no pre-payment penalty on microfinance loans.