RBI Issues Advisory Document on Microfinance Lending Regulation, Seeks Feedback from Stakeholders

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The Reserve Bank of India (RBI) on Monday issued an advisory document proposing regulation of microfinance lending firms. The central bank requested feedback from stakeholders by July 31st.

According to RBI, the proposed structure is aimed at protecting microfinance borrowers from over-indebtedness. The proposed rules are intended to apply to microfinance loans by all regulated entities, he added.

According to the central bank, the proposed structure aims to allow competitive forces to lower interest rates by empowering borrowers.

Key proposals in the document include a common definition of microfinance loans for all regulated entities, a council-approved policy for assessing household income, and limiting the outflow of funds to repay household loans as a percentage of household income.

RBI also proposed no prepayment penalty, no collateral requirement, and more flexibility in repayment frequency for all microfinance loans.

A proposal to introduce a standard simplified microfinance loan pricing newsletter for greater transparency was also included in the advisory document.

The document proposes that regulated organizations display the minimum, maximum and average interest rates charged on microfinance loans on their websites.

Aligning NBFC-MFI pricing guidelines with NBFC guidelines and canceling the dual lender norm for NBFC-MFI lending are also among the key proposals.

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