India’s central bank removes tariff restrictions on microfinance loans

MUMBAI, March 14 (Reuters) – The Reserve Bank of India has removed price caps on microfinance loans from financial institutions, the central bank said in a circular issued on Monday setting out new guidelines for microfinance.

Previously, limits were placed on the maximum interest rate a microfinance lender could charge on loans, which was set at a maximum of 10 to 12 percentage points above the institutions cost of funds or 2, 75 times the average base rate of the five major commercial banks. .

Any loan granted without collateral to a household whose annual income does not exceed 300,000 Indian rupees ($3,918) is considered a microfinance loan.

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The RBI had issued a discussion paper on microfinance lending in June 2021 and issued final guidelines after taking into account comments received from stakeholders.

In its consultation document, the RBI said that the boards of directors of microfinance institutions will have the freedom to determine interest rates on loans, while adding that it wanted to create a level playing field for all lenders so that the market mechanism leads to a reduction in lending. rate across the industry.

“Interest rates and other fees/commissions on microfinance loans should not be usurious. They should be subject to supervisory control by the Reserve Bank,” the statement said.

RBI also said lenders should adopt flexible repayment policies to meet borrowers’ needs.

The central bank has also issued stricter guidelines for credit collection, customer agreements and staff training.

The new guidelines will come into effect on April 1, 2022, the RBI said.

Microfinance companies in India typically cater to people without bank accounts and the sector has an outstanding portfolio of 2.26 trillion rupees ($29.52 billion) as of September 2021, according to Equifax.

Bankers and analysts estimate that more than 50% of the market still remains untapped, which has generated a lot of interest from global private equity and venture capital firms.

($1 = 76.5600 Indian rupees)

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Reporting by Swati Bhat and Nupur Anand; Editing by Simon Cameron-Moore

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