Page 10 - Banking Finance July 2021

RBI CORNER

rules come after a series of problems with annual income of Rs 1.25 lakh nonbanking finance company --
in the financial sector, starting with and Rs 2 lakh for rural and urban microfinance institutions/ NBFCMFIs
the collapse of IL&FS and the crises areas, respectively. If the (annual household income not
at Yes Bank, DHFL and PMC Bank. recommendations are accepted, exceeding Rs.1.25 lakh for rural and
lenders will have to disclose pricing in Rs.2 lakh for urban and semiurban
At the heart of the protest is the RBI's
a standard simplified fact sheet. areas), will be extended to all REs.
decision to stop reappointment of a
firm for six years after its three-year "In having a common definition of Collateral-free loans to households as
term is over. Besides, it has put in microfinance loans for all regulated defined above will be defined as
place rules barring statutory auditors entities, it will ensure a level playing microfinance loans. To assess
from taking non-audit work to avoid field, making it entity-agnostic as household income, it is proposed that
any conflict of interest. In case of done by MFIN as part of its voluntary income assessment should be carried
public sector banks, all-India financial Code of Responsible Lending (CRL). out at the household level.
institutions and urban cooperative The focus on responsibility on boards To address the concerns of over-
banks in Maharashtra, a three-year promoting good governance and indebtedness, the framework
term is already the norm for statutory sound operational policies is a proposes to link the loan amount to
central auditors (SCA). For private welcome step," said Alok Mishra, CEO household income in terms of debt-
banks the term was fixed at four years. and director of MFIN - an association income ratio. The intention of the
of micro lenders.
Similarly, the six years' rotation policy proposed regulation is to ensure that
has been in existence for SCAs of "The suggested framework in the the household is not strained.
private and foreign banks, which has consultative document is intended to Accordingly, the payment of interest
now been extended to other entities. be made applicable to the and repayment of principal for all
Dismissing suggestions that RBI's April microfinance loans provided by all outstanding loans of the household at
guidelines are meant to favour Indian entities regulated by the RBI and is any point of time shall be capped at
firms, sources told that the idea was aimed at protecting borrowers from 50 per cent of the household income.
to usher in better monitoring of some over-indebtedness as well as enabling Existing loans to the households which
of the failed and controversial competitive forces to bring down the are not complying with the limit of 50
ventures in recent years, which were interest rates by empowering the per cent of the household income,
audited by some of the big names in borrowers to make an informed shall be allowed to mature.
business. decision," the RBI said.
However, individual RE may adopt a
RBI proposes pricing RBI proposes regulatory conservative threshold as per their
own assessments and Board approved
restrictions for micro- framework for micro- policy.
finance institutions lenders As a measure of customer protection,
The RBI has proposed to remove All lenders maybeasked to adopt a microfinance borrowers of all REs
pricing restrictions for microfinance common household incomelinked shall be provided with the right of
institutions (MFIs) in a report that definition to identify microfinance prepayment without attracting
reviewed regulations for the sector. borrowers, and ensure that at least penalty, as is the case for NBFC-MFIs,
The report has proposed a uniform half of these borrowers' income is as per RBI's consultative document on
definition for microfinance loans for available to meet their other regulation of microfinance.
banks, MFIs, and non-banking finance expenses, according to the Reserve
In order to empower the
companies (NBFCs), and said that Bank of India's proposed regulatory
microfinance borrowers to make an
lending to a household should be framework for microfinance activities informed decision, a standardized and
capped in relation to its income. undertaken by all Regulated Entities. simplified one-page disclosure format
Other proposals include doing away As per the proposed guidelines, a containing information only on pricing
with pre-payment penalty and common definition of a microfinance of microfinance loans shall be
collaterals for loans to households borrower, as currently applicable to prescribed for all REs.

10 | 2021 | JULY | BANKING FINANCE