Reserve bank of India raised the lending cap for MFIs (Microfinance Institution) to Rs 1.25 lakh. RBI stated that the primary objective is to address the concerns related to the over-indebtedness of microfinance borrowers. The decision is to enable the market mechanism. It is considered to bring the interest rates downward in the microfinance sector. This is a framework that will regulate microfinance loans.
It consists of more than 3000 microfinance companies MGIs, NGOs, and MFIs. These are financial companies that provide small loans to people who do not have any access to bank facilities. In India, all loans worth Rs 1 lack or below comes under microloans.
Moreover, the top microfinance companies in India are estimated to account for almost 74% of total loans outstanding. These are the bankers and leaders who provide microfinance services. These services can be deposits, loans, payment services, money transfers, and insurance.
It serves the needs of economically marginalized populations. Bandhan Financial services limited is the largest microfinance company based out of Kolkata. MFIs in India are of two kinds. Those regulated by the Reserve Bank of India are called Non-banking financing companies, or NBFC MFIs. And some are those which are run by non-profit trusts and societies.
Breaking Barriers defined in the decision
- A common set of rules for microloans, irrespective of the lender
- Microloans to cap at 50% of the household income to avoid indebtedness
- Interest rate cap on MFIs to go, allowing multiple lending
- All lenders have to spell minimum, average, and maximum rates
- A common definition of microfinance loans for all regulated entities
- No pre-payment penalty
- no requirement of collateral
- greater flexibility of repayment frequency
According to the RBI, there should not be any pre-payment penalty. There should not be any disclosure of pricing. The associated data needs to be an ordinary simplified sheet. However, should display a common interest charged on these loans.
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