From UPSC perspective, the following things are important :
Prelims level : MFIs
Mains level : Paper 3- Freeing up microfinance institutions
The microfinance institutions (MFI) faced several restrictions by RBI which were not applicable to banks, NBFC and small finance banks. This denied the MFIs level playing field. A recent Consultative document by the RBI frees MFIs from such restrictions. The article explains this in detail.
Background of regulation of MFI’s by RBI
- RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92.
- In 2000, RBI permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending.
- Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit-taking institutions there is no need to regulate them.
- That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
- Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011.
- These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).
- It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.
How these norms created the issue of a level playing field?
- After 2015-16, the entry of small finance banks, eight of which were MFIs, into the microfinance space started to create issues.
- MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs).
- The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits.
- It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness.
- In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.
- The recent Consultative Document by RBI frees MFIs from the restriction imposed by the 2011 regulations and gives them a level-playing field.
- Another important feature for MFIs is that by doing away with the 50% income generation loans criteria and the repayment period norms.
- RBI is facilitating credit flow into lifecycle needs like housing, water sanitation, education, health, renewable energy, etc, which are now as important as income generation.
- On the interest rate front, initially, some upward correction could be there by medium and small MFIs based on their borrowing rates.
- The document enhances the role for the regulator as the adoption of Board-approved policies to determine the norms of household indebtedness and to fix a transparent rate of interest by each institution and their implementation need a rigorous supervisory oversight
Providing a level playing field to the MFI is critical to their development, the document by RBI rightly does that. It will help in providing credit to those who remain outside the formal banking network.