What’s in it for consumers, lenders

The Reserve Bank of India recently issued a master circular regarding microfinance lending. The circular specifies many changes at the policy level, including the definition of microfinance.

The new regulation applies to all financial entities dealing with microfinance loans. This means that all commercial banks, cooperative banks, NBFCs, NBFC-MFIs and housing finance companies, except payment banks, must now be governed by the same rules for microfinance loans.

Learn more here

How do the new rules help?

The new regulations level the playing field for each type of lender in the microfinance segment and aim to help people access credit at lower cost.

“With NBFCs and MFIs now able to charge reasonable costs, this will systematize and reduce their cost of funds, giving them the opportunity to expand their target market. This will help them reach more people across all customer segments, as well as drive financial inclusion,” said Amit Das, co-founder and CEO of Think360.ai, a data science company. complete.

With NBFCs and MFIs now able to charge reasonable costs, this will systematize and reduce their cost of funds

Here are some ways the new rules can help you.

1. Loan card: Every regulated entity designated as commercial bank, cooperative bank, housing finance companies, NBFC-MFIs, except payment banks, must provide their borrowers with a complete loan card document in easy-to-understand language.

This comprehensive loan card document will contain information on all loan terms and conditions, loan repayment acknowledgments, if applicable, details of installments received, and final loan release, if applicable. In addition, this loan card will also contain the necessary details of the grievance system, including the name and contact number of the nodal officer appointed by the regulated entity.

“The new RBI Main Circular promotes transparency and growth in the microfinance lending industry. Previously, interest rates were prescribed, but now they are calculated based on risk premium, cost of funds, margin and other factors. The lender must also justify that the borrower obtains a loan at the said rate. The risk premium component of the loan interest rate is adjusted based on an individual’s loan repayment capacity. For example, if someone is a repeat borrower with a good credit history, they will get loans at a cheaper rate,” said Dr. N. Jeyaseelan, CEO of Virutcham Academy for Social Changemakers LLP.

2. Staff training: The RBI Main Circular has also laid down certain guidelines regarding the training of staff employed by the registered entity. It says that the conduct of staff towards customers should also be incorporated into their salary package. This effectively implies that any staff member who misleads or does not help the borrower to properly understand the terms of the loan, or, provides other relevant information, will receive less compensation. “Employee training should include programs to instill appropriate behavior towards customers. Employee conduct towards customers must also be appropriately incorporated into their compensation matrix,” the circular adds.

3. Loan recovery: Many reforms have been introduced in this regard, all of which aim to facilitate the process of loan recovery for both the lender and the borrower. In addition, at the time of the loan itself, registered entities will be required to provide information on the grievance redress mechanism for the recovery of the loan, so that the borrower can avail of the redress facility should the need arise.

The circular also stated that even if the work is subcontracted to a third party company, the responsibility for conduct towards borrowers also rests with the registered entity. This is because if the employees of the third party company misbehave with the borrower, the registered entity that hired that third party company will be liable.

“The outsourcing of any activity by the regulated entity (RE) does not diminish its obligations, and the burden of complying with these instructions rests solely with the RE”, further specifies the circular.

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