Context: Recently, the Reserve Bank of India (RBI) has pitched for a uniform regulatory framework for all lenders in the microfinance industry.
Need of Regulatory Framework for Micro Lending Industry
Rising MFI industry: After the Y H Malegam Committee (on MFIs) in 2011, RBI gave birth to NBFC-MFIs; however other institutions like universal banks, small finance banks etc, have also opened up.
The microloan industry has risen from Rs 22,544 crore in 2010 to Rs 2.33 trillion in 2020.
The number of micro borrowers has more than doubled — from close to 27 million in 2010 to over 58 million now; Average microloan size increased by four times in the same period.
MFIs have regionally expanded to 37 states and Union Territories and more than 600 districts, even as the share of urban business dropped from 27% to 23%.
West Bengal has replaced Andhra Pradesh in terms of MFI business, followed by Tamil Nadu, Bihar, Karnataka and Maharashtra.
Un-level playing field: certain RBI norms are applicable only to NBFC-MFIs and not to other intermediaries. These restrictions are -
Not more than two NBFC-MFIs can lend to the same borrower.
Credit limit at Rs 75,000 for the first loan, which can rise up to Rs 125,000 subsequently.
Both pricing of loan and processing fees are regulated for NBFC-MFIs.
Must give 85% of their loans without any security; and Necessity of priority sector lending of 40% and 85% of loans for universal and small finance banks.
Tenure of loans is capped at two years if they are higher than Rs 30,000.
Limitation over the interest rate, i.e. NBFC-MFIs can charge either a 10% point spread over their average cost of funds or 2.75 times the average of five banks’ base rate.
Loan-waivers: For e.g. In Assam, both the ruling party and the opposition have announced a microloan waiver in the run-up to the elections.
Way Forward:
Ensure Uniformity in norms: for the size of exposure and number of loans, a borrower and interest rate can be left to the market.
Broaden ambit of microloans: (beyond income-generating loans) must be classified as livelihood loans for health, education and buying a home.
Allow higher credit: > than 15% secured credit to NBFC-MFIs to de-risk their portfolio.
Ban loan waiver poll promises: of all political parties by Election Commission of India.