The Reserve Bank of India has recently published a master circular regarding microfinance loans. The circular specifies many policy level changes, including the definition of microfinance.
The new regulation applies to all financial entities dealing with microfinance loans. This means that all commercial banks, co-operative banks, NBFCs, NBFC-MFI, and housing finance companies, except payments banks, are now to be governed by the same rules for microfinance lending.
The new regulation levels the playing field for every type of lender in the microfinance segment and is aimed at helping people get cheaper access to credit.
“With NBFCs and MFIs now being able to charge reasonable costs, it will systematise and lower their cost of funds, giving them the opportunity to expand their target market. This will help them address more people across customer segments, as well as drive financial inclusion,” said Amit Das, co-founder and chief executive officer at Think360.ai, a full-stack data science company.
1. Loan Card: Every regulated entity that is designated as a commercial bank, co-operative bank, housing finance companies, NBFC-MFIs, except for payments banks, shall provide their borrowers with a comprehensive loan card document in an easy to understand language.
This comprehensive loan card document will have information about all the terms and conditions of the loan, acknowledgements about loan repayment, if any, details of instalments received, and final loan discharge, if applicable. In addition, this loan card will also have the necessary details of the grievance redressal system, including the name and contact number of the nodal officer appointed by the regulated entity.
“The new master circular by the RBI promotes transparency and growth in the microfinance lending sector. Earlier, the interest rates were prescribed, but now they are calculated based on risk premium, cost of funds, margin, and other factors. The lender also has to justify the borrower getting a loan at the said rate. The risk premium component in the loan interest rate is adjusted based on an individual’s loan repayment capacity. For instance, if someone is a repeat borrower with a good credit history, then he/she will get loans at a cheaper rate,” said Dr N. Jeyaseelan, CEO, Virutcham Academy for Social Changemakers LLP.
2. Training of Staff: The master circular by the RBI has also laid down some guidelines regarding the training of staff employed by the registered entity. It said there that the conduct of the staff towards customers shall also be incorporated in their salary package. This effectively implies that any staff who misguides or does not help the borrower understand the loan terms correctly, or, provide with other relevant information, will get a lower compensation. “Training to employees shall include programs to inculcate appropriate behaviour towards customers. The conduct of the employees towards customers shall also be incorporated appropriately in their compensation matrix,” the circular added.
3. Recovery of Loans: Many reforms were introduced in this respect, all of which aim to make the loan recovery process smooth for both the lender and the borrower. Also, at the time of borrowing itself, the registered entities will have to provide information about the grievance redressal mechanism for loan recovery, so that the borrower can avail of the redressal facility should the need so arise.
The circular also stated that even if the work is outsourced to a third-party company, then the responsibility of conduct towards borrowers shall also rest with the registered entity. In effect, should the employees of the third party company misbehave with the borrower, then the registered entity which engaged such third-party company shall be liable.
“Outsourcing of any activity by the regulated entity (RE) does not diminish its obligations, and the onus of compliance with these directions shall rest solely with the RE,” the circular further said.
