Paper

Responsible & Viable Microlending Needs "Smart" Regulation: Some Suggestions from EDA & M-CRIL

Examining issues from RBI's microfinance policy announcements
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This paper contains a summary of the revised regulatory framework proposed  by the Reserve Bank of India (RBI) for microfinance non-banking financial companies (NBFC MFIs), followed by EDA and M-CRIL's comments on the revised framework. It urges smart measures to make responsible lending more effective for financial inclusion while enabling viable functioning of MFIs. The RBI through its circular of December 2, 2011, took charge of NBFC MFIs as a separate category and started to specify prudential and operational rules for the smooth growth and responsible functioning of the sector. It has notified revisions in the original norms through a circular dated August 3, 2012. Key aspects for consideration are:

  • Cost of compliance in the context of renewed emphasis on group promotion processes, more intensive relationships with low income clients, and client protection;
  • Prevailing pricing penalizes MFIs that incur high cost due to their commitment to responsible finance as well as those who are innovative in raising funds at low cost;
  • Alternative ways to reduce the cost of credit to borrowers such as providing funding to MFIs in the form of low cost loans from development banks.