RBI has recently released its Consultative Document on Regulation of Microfinance sector aimed at protecting and empowering borrowers. As per the framework, the household income will be as per a board-approved policy. There will be no pre-payment penalty and collateral for all microfinance loans and a simplified fact sheet on the pricing of loans will be introduced.
Such guidelines were earlier issued by RBI under the Non-Banking Financial Company Micro Finance Institutions (Reserve Bank) Directions, 2011.
Microfinance: Microfinance is a basis of financial services for entrepreneurs and small businesses deficient in contact with banking and associated services. The term “microfinancing” was first used in the 1970s during the development of Grameen Bank of Bangladesh, which was founded by the microfinance pioneer, Muhammad Yunus. In 1976, Yunus institutionalized the approaches of microfinance, along with the foundation of Grameen Bank in Bangladesh.
Bodies associated with microfinance include Sidbi, Nabard, and Mudra.
Financial inclusion works on the philosophy of ‘banking for the unbanked’.
Benefits of microfinancing
The consultations are still in progress and if executed properly, they’ll mark a paradigm shift for the MFI sector and provide a boost to our dwindling economy facing the brunt of the Covid pandemic.