RBI: All micro loans must be collateral-free

The RBI has said it proposes to make micro-lending collateral-free, not just for microfinance institutions (MFIs) but for all lenders. This follows non-MFIs adopting harsh collection measures, arbitraging the different regulations for MFIs and other lenders.

Delivering the inaugural address at the Sa-Dhan National Conference on ‘Revitalising financial inclusion’, RBI deputy governor Rajeshwar Rao said that current regulations have created a non-level playing field. “The current regulatory framework, which was put in place with the objective of making credit available to low-income households and to protect borrowers from harsh recovery practices of the lenders, is applicable only to NBFC-MFIs. Whereas other lenders, who now have a share of around 70% in the microfinance portfolio, are not subjected to similar regulatory conditions,” he said.

Rao asked lenders to be cautious and not to copy the large ones as microlending has a social objective. “Prioritisation of profitability at the expense of social and welfare goals of microfinance may not be an optimal outcome. Lenders need to remain cognizant of the fact that the balance sheet growth should not be built by compromising on prudent conduct,” he said.

Rao pointed out that borrowers who take microloans lack the type of collateral preferred by lenders. However, he noted, lenders still repossess whatever little collateral they have for pledging. “It is more for inducing repayments rather than to recover losses. Therefore, it has been proposed to extend the collateral-free nature of microfinance loans, as applicable to NBFC-MFIs, to all lenders in microfinance space.”