Microfinance lenders should not charge usurious rates of interest, RBI says in revised norms for the sector
The Hindu
Central bank removes ceiling on interest rates, revises upward the amount eligible to be tagged as microfinance loan
The Reserve Bank of India (RBI) on Monday allowed microfinance institutions the freedom to set interest rates they charge borrowers, with a caveat that the rates should not be usurious.
In revised guidelines for microfinance loans, which will take effect April 01, 2022, 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 ₹3 lakh. Earlier, the upper limits were ₹1.2 lakh for rural borrowers and ₹2 lakh for urban borrowers.
As per the revised norms, regulated entities (REs) should put in place a board-approved policy regarding pricing of microfinance loans, a ceiling on interest rate and all other charges applicable to microfinance loans.
“The revision of the income cap to ₹3 lakh will expand the market opportunity and interest rate cap removal will promote risk-based underwriting, said Udaya Kumar Hebbar, MD and CEO at CreditAccess Grameen Ltd. “This reflects the confidence shown by the central bank in the ability of MFIs to responsibly cater to the bottom of the pyramid,” he said.
“Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank,” the RBI said in its master direction.
Earlier, the cap on the Interest rate was the lower of: average cost of borrowing multiplied by 2.75; or cost of funds plus 10%, according to microfinance industry executives.
Each RE shall disclose pricing-related information to a prospective borrower in a standardised, simplified factsheet, the RBI said.
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