Mumbai: The Reserve Bank of India (RBI) has liberalized the eligibility rules for microfinance beneficiaries to allow a wider range of recipients to be covered by this mode of financial inclusion.
RBI has been trying to expand the scope and reach of credit in the economy to stimulate aggregate demand and to sustain the growth impetus.
As part of that effort, the central bank announced in its statement on development and regulatory policies, which was issued along with Friday’s monetary policy statement, that both the maximum household income criteria and loan amount are being increased to improve the coverage of microfinance.
The income limit for each rural household to be eligible for microfinance has now been increased from ₹1 lakh to ₹1.25 lakh, and from ₹1.6 lakh to ₹2 lakh for urban and semi-urban areas. This is expected to bring a larger number of rural, semi-urban and urban households under the fold of microcredit. Second, RBI has also increased the lending limit for each eligible borrower from ₹1 lakh to ₹1.25 lakh. Both these eligibility measures are necessary to qualify a loan as a microfinance asset. RBI had last revised these eligibility limits in 2015.
Both measures are expected to expand the pool of beneficiaries at the bottom of the pyramid, as well as increase the flow of credit in absolute amounts through this channel.
Microfinance is an established mechanism for providing low-income households with affordable finance to build sustainable assets that can deliver a steady income over the life of the asset.
The RBI board set up a sub-committee in 2011, under the chairmanship of Y.H. Malegam, to study issues and concerns relating to the microfinance industry after a microfinance crisis in Andhra Pradesh in 2010. In its report, the committee defined the industry as the following: “Microfinance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which include, in addition to the provision of credit, many other services such as savings, insurance, money transfers, counselling, etc."
As a consequence of the Malegam committee report, RBI decided to set up a separate category of non-banking financial institutions: Non-banking financial company-micro finance institution (NBFC-MFI), and a detailed regulatory framework was laid down for this category in 2011.
In its statement on Friday, RBI said the action was justified for the following reason: “Taking into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid and enable them to play their assigned role in a growing economy…"
As per data available till September 2018, NBFC-MFIs as an industry, had disbursed loans worth ₹388 billion against borrowings of ₹309 billion.
Interestingly, a number of MFIs have converted into small finance banks, including Ujjivan Small Finance Bank, Equitas Small Finance Bank, Fincare Small Finance Bank and Jana Small Finance Bank. Many of these institutions will have to mandatorily launch an initial public offering soon, as part of RBI’s regulatory framework.