RBI eases lending norms for microfinance companies

RBI Eases Lending Norms for Microfinance Companies

Introduction

The Reserve Bank of India (RBI) has announced new measures to support microfinance institutions (MFIs) and expand their borrower base. These changes aim to promote financial inclusion and contribute to the achievement of the Sustainable Development Goals (SDGs).

New Lending Limits

• The total indebtedness limit for borrowers has been raised from ₹50,000 to ₹1 lakh.
• Educational and medical expenses are not included when calculating a borrower’s indebtedness.
• The annual income limit for rural households has been increased from ₹60,000 to ₹100,000, and for urban or semi-urban regions from ₹120,000 to ₹160,000.

Loan Disbursement

• In the first disbursement cycle, MFIs can provide up to ₹60,000, compared to the previous limit of ₹35,000.
• In subsequent cycles, the loan amount that can be disbursed has been raised to ₹100,000 from ₹50,000.

Positive Impact on Financial Inclusion

The RBI’s decision to raise lending limits for MFIs has been welcomed as a positive development. This move allows microfinance companies to better serve a wider range of borrowers, addressing the credit demand in the “unfunded” world, where funding needs range from ₹50,000 to around ₹20 lakh. Alok Prasad, CEO of the Microfinance Institutions Network (MFIN), emphasizes the importance of further loosening up regulations to enable greater financial inclusion.

Regulatory Guidelines

The RBI will be issuing detailed guidelines regarding these changes in the near future. These guidelines will provide further clarity and ensure the proper implementation of the new lending norms.

Background

The microfinance industry faced challenges after a crisis in Andhra Pradesh in 2010, resulting from unregulated lending practices. Since then, the RBI has introduced regulations to govern the sector and limit lending capabilities. However, these new measures aim to strike a balance between regulation and financial inclusion, fostering sustainable development.

Conclusion

The RBI’s decision to ease lending norms for microfinance companies is a significant step towards achieving the SDGs. By expanding access to credit and promoting financial inclusion, these measures contribute to poverty reduction, economic growth, and sustainable development.

SDGs, Targets, and Indicators

1. SDG 1: No Poverty

   • Target 1.4: Ensure that all men and women, in particular, the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
   • Indicator 1.4.2: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and type of tenure.

2. SDG 8: Decent Work and Economic Growth

   • Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all.
   • Indicator 8.10.2: Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile money service provider.

Analysis

The article discusses the Reserve Bank of India (RBI) raising the limits for lending by microfinance institutions (MFIs) and widening the base of borrowers for such companies. This is relevant to SDG 1 (No Poverty) as it aims to ensure equal rights to economic resources and access to basic services for the poor and vulnerable. It is also relevant to SDG 8 (Decent Work and Economic Growth) as it focuses on expanding access to banking and financial services for all.

Based on the article’s content, the specific targets that can be identified are:

1. Target 1.4: Ensure that all men and women, in particular, the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
2. Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance, and financial services for all.

The article mentions the following indicators that can be used to measure progress towards the identified targets:

• Indicator 1.4.2: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and type of tenure.
• Indicator 8.10.2: Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile money service provider.

Table: SDGs, Targets, and Indicators

Source: livemint.com