Context:
Rising concerns over credit expansion underscore the need for stronger regulations of Microfinance institutions in the country.
Microfinance:
- Also termed as microcredit
- Refers to banking services provided to low-income individuals or groups who lack access to traditional financial services.
- Services Offered –
- Savings Accounts: Providing a safe place for individuals to save money.
- Checking Accounts: Allowing for easy access to funds and transactions.
- Fund Transfers: Facilitating the transfer of money between accounts.
- Micro Insurance: Offering insurance products tailored to the needs of low-income clients.
- Microcredit: Extending small loans to individuals or groups to support entrepreneurial activities.
Microfinance Sector in India:
- Reserve Bank of India (RBI) serves as the regulatory body for MFIs.
- Malegam Committee, constituted by the RBI in 2010, recommended a holistic framework to regulate Non-Banking Financial Company-Microfinance Institutions (NBFC-MFIs)
- India’s 1st Microfinance Institution (MFI) – Self Employed Women’s Association (SEWA) Bank
- Govt Initiatives –
- Indian Micro Finance Equity Fund (IMEF), operated through the Small Industries Development Bank of India (SIDBI)
- Self Help Group – Bank Linkage Programme
- Pradhan Mantri MUDRA Yojana
RBI Guidelines on Microfinance:
- Collateral-Free Loans: Microfinance loans are collateral-free loans for households with income up to Rs 3 lakh.
- Flexible Repayment Policies: Entities must have policies for flexible repayment and household income assessment.
- Cap on Lenders Removed: The cap on the number of lenders per borrower has been removed; however, repayments cannot exceed 50% of the borrower’s monthly income.
- Loan Qualification: 75% of NBFC-MFI loans must qualify as microfinance, down from the previous 85%.
- Income Reporting: Entities must report income discrepancies and household income.
- No Pre-Payment Penalties: There are no pre-payment penalties on microfinance loans; late fees apply only to overdue amounts.
- Interest Rate Transparency: Interest rates must be transparent and disclosed to borrowers in a standardized format.
- Borrower Protection: Emphasis on borrower protection, including measures to prevent over-indebtedness and ensure fair treatment.
- Grievance Redressal: Establishing a grievance redressal mechanism and formulating a code of conduct for ethical lending.
Source: BL
Previous Year Question
Pradhan Mantri MUDRA Yojana is aimed at:
[UPSC Civil Service Exam – 2016 Prelims]
(a) bringing the small entrepreneurs into formal financial system
(b) providing loans to poor farmers for cultivating particular crops
(c) providing pensions to old and destitute persons
(d) funding the voluntary organizations involved in the promotion of skill development and employment generation
Answer: (a)