Rapid expansion in the microfinance sector has been credited with advancing financial inclusion in India, even as much of this growth has focused exclusively on simple group loans and credit-linked insurance. Both central bank regulations and self-regulations seek to address the risk of over-indebtedness often associated with rapid credit expansion through the implementation of lending caps and mandatory credit reporting, while recent regulatory developments additionally emphasize the need for lending institutions to detect and prevent mis-sale. This paper seeks to understand what might constitute a loan mis-sale and to inform the use of suitability guidelines for lending to low-income households by MFIs, SHGs and banks.
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