MICROCAPITAL BRIEF: RBI Proposes Reforms Including Debt-income Ratio Cap, Repeal of Interest Rate Ceiling for Microfinance Institutions in India

The Reserve Bank of India (RBI) recently proposed a set of new rules that include eliminating the cap on the interest rates that microfinance institutions (MFIs) charge their customers and harmonizing microlending regulations for all organizations providing microloans. This would include a debt-income ratio cap for MFIs, banks and non-bank financial institutions (NBFIs), where “payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 percent of the household income.” Part of the motivation for the changes is to “create a level playing field,” as the interest rate cap now only applies to MFIs, but not to banks or NBFIs.

P Satish, Executive director of Sa-Dahn, an association representing 225 NBFIs and MFIs said, “The RBI feels institutions have matured to such a level that they will be able to make decisions that keep the interest of borrowers in mind. This is a watershed moment as far as the regulatory framework for the microfinance sector is concerned.”

As part of the new package of proposals, all lenders would be required to: (1) clearly communicate the maximum, minimum and average interest rates they charge on microloans; and (2) offer microborrowers the choice to pay back their loans in weekly, bi-weekly or monthly installments. Microlenders also would be barred from requiring collateral or charging prepayment penalties.

The new rules would apply to borrowers that have annual household incomes under INR 200,000 (USD 2,700) or – for rural borrowers – under INR 160,000 (USD 2,160). These thresholds are INR 125,000 (USD 1,700) and INR 100,000 (USD 1,350), respectively, as of early 2021.

Established in 1935, RBI performs consolidated supervision of commercial banks, NBFIs and other financial institutions. It also manages accounting standards, resolves cases of banking fraud, monitors non-performing assets and supervises the rating model for the banking sector.

By Sophie Fiala, Research Associate

Sources and Additional Resources

RBI press release
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51725

Business Standard article
https://www.business-standard.com/article/finance/rbi-proposes-to-lift-interest-rate-cap-on-microfinance-institutions-121061500044_1.html

RBI homepage
https://www.rbi.org.in/

Sa-Dahn homepage
http://www.sa-dhan.net/

Previous MicroCapital article on RBI
https://www.microcapital.org/microcapital-brief-rbi-raises-caps-on-microfinance-loan-size-microborrower-income/

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