The Reserve Bank of India (RBI) gave microfinance institutions the authority to determine their own interest rates for borrowers on Monday, with the condition that the rates should not be usurious.
The RBI adjusted the definition of a microfinance loan in the new rules for microfinance loans, which will take effect on April 1. A microfinance loan is a collateral-free loan given to a household with an annual income of up to Rs. 3 lakh. Earlier, the top limits for rural borrowers were Rs. 1.2 lakh and Rs. 2 lakh for urban borrowers.
According to the amended rules, regulated entities (REs) must implement a Board-approved policy for pricing microfinance loans, as well as a ceiling on interest rates and all other fees that apply to microfinance loans.
According to Udaya Kumar Hebbar, MD and CEO of CreditAccess Grameen Ltd, “the modification of the income cap to Rs. 3 lakh would extend the market opportunity, and the elimination of the interest rate cap will promote risk-based underwriting.”
“This indicates the central bank’s confidence in MFIs’ ability to appropriately serve the bottom of the pyramid,” he said.
“On microfinance loans, interest rates and other charges/fees should not be usurious. The Reserve Bank will conduct supervisory examinations of these, “the RBI stated in its master directive.” According to industry executives, the interest rate cap used to be the lower of the average cost of borrowing multiplied by 2.75 or the cost of funds plus 10%.
Source: The Hindu