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Microfinance institutions can now set interest rates

  • IAS NEXT, Lucknow
  • 16, Mar 2022
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The Reserve Bank of India (RBI) allowed microfinance institutions the freedom to set interest rates on the loans that they lend.

Key takeaways 

  • The guidelines will take effect from 1st April 2022.
  • The RBI tweaked the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh. 
    • Earlier, the upper limits were Rs. 1.2 lakh for rural borrowers and Rs. 2 lakh for urban borrowers.
  • There shall be no prepayment penalty on microfinance loans.
  • Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

Microfinance institutions

  • Microfinance offers a solution to small business owners, who do not have access to banking and associated services. 
  • These institutions offer services similar to that of a bank.
  • They do charge interest on loans but the interest rate is lower than that charged by most banks in the country.
  • They help small- and medium-sized businesses scale up with access to funds at the right time.
  • They worked as an alternative, with an aim to create financial equality. 
  • In India, there are two channels through which microfinance operates:
    • SHG – Bank Linkage Programme (SBLP)
    • Microfinance Institutions (MFIs)