The Reserve Bank of India (RBI) has allowed micro-finance lending institutions to fix interest rates on loans. With this said that it should not be too much. A micro-finance loan refers to a guarantee-free loan given to a family with an annual income of up to Rs 3 lakh. Let us tell you that earlier RBI itself used to announce interest rates on quarterly basis. But now the power to decide the interest rate is being delegated to the micro-finance lending institutions.
What RBI said: The Reserve Bank said that all regular entities should implement a policy approved by the Board of Directors. There is a need to bring clarity in the policy regarding micro-finance loan pricing, cover, interest rate ceiling and all other charges. The new provisions will come into effect from April 1, 2022.
Here is the condition: In addition, each regular entity must provide cost-related information about a potential borrower in the form of a standardized simple ‘factsheet’. Apart from this, the central bank has also said that if the borrower wants to repay his loan prematurely, then no penalty should be imposed on him. However, if there is a delay in the payment of the installment, the institution can impose a penalty on the customer but that too will be levied on the outstanding amount and not on the entire loan amount.
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The Reserve Bank said that in respect of repayment of a micro-finance loan, a maximum amount of 50 percent of the monthly income of the borrower can be made the repayment limit. Apart from this, provision has also been made to prepare the loan agreement in a language understandable to the borrower.
Under the old guidelines, non-banking financial companies (NBFCs) that did not qualify as a micro-finance institution could not extend micro-finance loans to more than 10 per cent of their total assets. But now its maximum limit has been increased to 25 percent.
What are the advantages: Welcoming the RBI’s new directions, Alok Mishra, Director, MFIN, an organization of micro-finance institutions, said that it will not only provide equal opportunities in the loan business but will also help in tackling the problem of over-debt and multiple lending.