Context:

The Reserve Bank of India (RBI) is looking to review the regulatory framework for microfinance. Currently, RBI guidelines on microfinance regulate NBFC-MFIs primarily.

Microfinance

Microfinance is a form of financial service which provides small loans and other fi financial services to poor and low-income households. Malegam Committee Report of 2011 helped establish micro-finance as a legitimate asset class.

How Microcredit is delivered?

• Microcredit is delivered through a variety of institutional channels viz.,
• Scheduled commercial banks (SCBs) (including small finance banks (SFBs) and regional rural banks (RRBs)) lending both directly as well as through business correspondents (BCs) and self-help groups (SHGs)
• cooperative banks
• non-banking financial companies (NBFCs)
• microfinance institutions (MFIs) registered as NBFCs as well as in other forms.

The new Framework

• Name: ‘Consultative Document on Regulation of Microfinance’
• The new framework includes-
  • A common definition of microfinance loans for all regulated entities
  • Capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income “
  • A board-approved policy for household income assessment
• Applicability: It would be uniformly applicable to all lenders in the microfinance space, including scheduled commercial banks, small finance banks, and other such entities.
• Malegam Committee Report of 2011 helped establish micro-finance as a legitimate asset class.