Why We Need Uniform Micro Loans

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.