RBI: All micro loans must be collateral-free

October 30, 2021

The Reserve Bank of India (RBI) has proposed to make micro-lending collateral-free for all the lenders, rather than just for microfinance institutions (MFIs).

Highlights

This proposal was announced by RBI deputy governor Rajeshwar Rao while he was delivering the inaugural address at Sa-Dhan National Conference on ‘Revitalising financial inclusion’.
In his address, he noted that, current regulations on financial inclusion have created a non-level playing field.

What is the current scenario?

Current regulatory framework was implemented with the objective of making credit available to low-income households as well for protecting borrowers from harsh recovery practices of the lenders. This regulatory framework is applicable only to NBFC-MFIs.
On the other hand, lenders with share of around 70% in microfinance portfolio, are not subjected to similar regulatory conditions.

Microfinance Institutions (MFIs)

MFI is an organization, offering financial services to the low-income populations. These services comprise of micro-savings, microloans, and microinsurance. These are the financial companies to provide small loans to people who do not have access to banking facilities.

Small Loans

In India, loans below Rs.1 lakh are considered as small loans or microloans. In most of the cases, interest rates are lower than what are charged by normal banks.

Growth of micro finance sector

Microfinance sector in India has grown rapidly in past few decades. It is serving about 102 million bank and small finance bank accounts of poor population.