RBI Removes Pricing Caps For Microfinance Lenders

The Reserve Bank of India has removed caps on pricing of microfinance loans, altering the definition of what qualifies as microloans.

Context

The Reserve Bank of India has removed caps on pricing of microfinance loans, altering the definition of what qualifies as microloans.

Maximum interest rate: The existing guidelines prescribe a maximum interest rate that a microfinance lender could charge on loans.
- This is 10-12 percentage points above the institution’s cost of funds, or 2.75 times the average base rate of the five-largest commercial banks, whichever is lower.
Board-approved policy: All microfinance lenders must now put in place a board-approved policy for the pricing of loans.
- The policy should include a well-documented interest rate model and the different interest rate components, such as cost of funds, risk premium, and margin.
- It should also contain the range of spread of each component for categories of borrowers and a ceiling on the interest rate and all other charges applicable to the microfinance loans.
Eligibility to avail loans (microfinance): RBI has also raised the annual household income level to Rs.3 lakh for classification of eligibility to avail of microfinance loans, thus increasing the market size.
- Earlier, the income caps were kept at ?.25 lakh in rural areas and ?2 lakh in other areas.

Microfinance institutions or MFIs are financial institutions that provide loans and other financial services to poorer sections of society.
Some of the MFIs, that qualify certain criteria and are non-deposit taking entities, come under RBI wings for NBFC Regulation and supervision.
These “Last Mile Financiers” are known as NBFC MFI or Non-Banking Financial Company-Microfinance Institutions.

The different types of institutions offering microfinance in India are: