Customer protection 'guiding light' of revamped microfinance regulations, says RBI deputy governor

• Reserve Bank of India’s (RBI) deputy governor M Rajeshwar Rao on Friday outlined several measures in the central bank’s revamped microfinance framework to safeguard customers.
  
• RBI had announced a revamped regulatory framework for microfinance institutions in March this year.
  
• From transparent pricing of loans to preventing intimidation of borrowers, here are the key aspects of the revamped guidelines for microfinance institutions.
  

Customer protection is the ‘guiding light’ of the central bank’s revamped microfinance regulations that came into effect in April, Reserve Bank of India’s deputy governor M Rajeshwar Rao said on Friday.

Rao said that with the new regulations the RBI has moved from a rule-based approach to a principle-based one in order to expand the availability of credit to the last mile, while improving the transparency and competition to foster a healthy environment.

In his keynote address at the India Microfinance Review organised by industry body MFIN, the deputy governor said the measures were intended to ensure customer protection, which was the “guiding light while revamping the regulatory regime for the microfinance sector”.

RBI’s revamped regulatory framework for microfinance institutions also relaxed norms for household income and repayment criteria to address the growing needs of borrowers.

For instance, the limit on maximum annual household income to avail credit from microfinance institutions was ₹1.25 lakh in rural areas, while in urban and semi-urban areas it was ₹2 lakh. This has now been increased to ₹3 lakh for all the three areas.

Rao, in his address, highlighted the following key new customer protection measures that are part of RBI’s revamped microfinance framework.

Transparent pricing of loans

Under the revamped framework, microfinance institutions will have to ensure transparency in the pricing of loans by clearly disclosing the methodology used in calculation of the effective interest rate.

Effective interest rate includes the impact of compounding, showing exactly how much a borrower is paying in the form of interest on a loan.

Rao said that this measure would not only help the borrower understand the total cost of a loan, but also help in comparing the cost amongst lenders to choose the best option.

Policies for conduct of employees

Rao also underlined that the boards of microfinance institutions should approve policies for the conduct of employees, including their recruitment, training and conduct.

These policies should also include programmes to train employees in interacting with customers and link it with their compensation matrix, he said.

No coercive recovery measures against borrowers

Lastly, the updated guidelines also require the microfinance institutions, or the recovery agencies outsourced by them, to not indulge in coercive recovery measures. This includes preventing recovery agents from intimidating borrowers or calling them before 8 am or after 7 pm.

The guidelines also require the boards of these institutions to lay down policies for grievance redressal mechanisms so that customer complaints can be addressed appropriately.

“While we acknowledge the rights of the lenders to recover overdue loans, I would like to make it clear in no uncertain terms that the Reserve Bank has zero tolerance for misconduct towards the borrowers,” Rao said.

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