The Reserve Bank of India, India’s central banking authority, has recently established new guidelines for nonprofit microfinance institutions (MFIs) and non-banking finance companies (NBFCs) aimed at improving client-side transparency. MFIs and NBFCs are now required to use a standard loan agreement form. The law also requires that borrowers are quoted an effective interest rate that takes into account the nominal interest rate, processing charges, insurance premiums and any other administrative charges. Late payments on loans may not be charged and collateral may not be seized. Mirolenders must also submit their loan agreements in the local language to be approved by RBI.
In addition to reforming loan agreement guidelines, RBI has stipulated that all microborrowers must receive loan cards that specify the effective interest rate, any terms and conditions, and the name and contact details of the authority to whom they may address complaints. Lenders must display a declaration of accountability for staff behavior in their offices, have more than one staff member present during the sanctioning and disbursement of loans and train staff to make inquiries as to any pre-existing debt a borrower may have.
All nonprofit MFIs and NBFCs must develop a “fair practices” code based on these guidelines to be approved by the organizations’ boards by the end of April.
By Charlotte Newman, Research Associate
About Reserve Bank of India
Established in 1935, the Reserve Bank of India (RBI) undertakes consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies (NFBCs). The current focus of RBI is to supervise financial institutions, consolidate accounting standards, resolve legal issues in cases of banking fraud, monitor non-performing assets and supervise the rating model for the banking sector. In 1979, the National Bank for Agriculture and Rural Development (NABARD) was formed at the behest of RBI to provide regulatory oversight to regional rural banks (RRBs) and to promote the development of agricultural lenders: tasks that had been the responsibility of RBI. While all microfinance institutions (MFIs) and non-banking financial companies still operate under RBI regulations, the responsibility for inspecting nonprofit MFIs, agricultural lenders, RRBs, state cooperative banks, district central cooperative banks and state cooperative agricultural and rural development banks was transferred to NABARD. RBI maintains these responsibilities for for-profit MFIs. Although RBI was originally the parent organization of NABARD and until October 2010 held a 72.5 percent stake in the outfit, RBI owns a one-percent stake in NABARD as of 2011.
Sources and Additional Resources:
The Hindu Business Line: “RBI Asks MFIs to Use Local Language for Agreement,” http://www.thehindubusinessline.com/industry-and-economy/banking/article3269476.ece?homepage=true&ref=wl_home
MicroCapital.org story, April 3, 2012, “MICROCAPITAL BRIEF: Reserve Bank of India Extends Deadline for New Provisioning, Asset Classification Norms for Non-Banking Finance Company Microfinance Institutions,” https://www.microcapital.org/microcapital-brief-reserve-bank-of-india-extends-deadline-for-new-provisioning-asset-classification-norms-for-non-banking-finance-company-microfinance-institutions/
MicroCapital.org story, March 28, 2012, “MICROCAPITAL BRIEF: Draft Microfinance Institution Bill in India to Moot Local Regulations, Allow RBI to Set Rate Cap, Establish Advisory Councils, Microfinance Development Fund,” https://www.microcapital.org/microcapital-brief-draft-microfinance-institutions-bill-in-india-to-moot-local-regulations-allow-rbi-to-set-rate-cap-establish-advisory-councils-microfinance-development-fund/
MicroCapital Universe Profile: Reserve Bank of India
https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Reserve+Bank+of+India+%28RBI%29
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