The Reserve Bank of India (RBI) in March 2022 introduced The Regulatory Framework for Microfinance Loans, 2022, a decade after the earlier regulations of 2012[1] . The 2012 regulations were the first set of regulations by the RBI in the microfinance space, which came in the aftermath of the 2010 microfinance crisis. Thus, they expectedly had a heavy prudential bent. The new regulations of 2022, however, are more open-ended and seek to enhance uniformity, responsibility and flexibility in the microfinance sector.
This study sought to understand the impact of the new regulations on the microfinance sector through the lens of different categories of stakeholders – customers, leadership at microfinance institutions (MFIs) and intermediating staff. Given the relatively mature market landscape[2] and the vastly varied customer cohorts that the microfinance sector is currently serving, the impact of the newly ushered regulations is bound to be uneven. By contrasting and comparing the perspectives and experiences of diverse stakeholders, we hope to glean a wholesome understanding of the different pathways through which the regulatory changes are operating to repurpose, reposition and reorient the sector.
The study finds widespread awareness about and acceptance of the new regulations. Given the vast diversity on both sides of the market – lenders and customers – the approaches to regulatory requirements vary widely, too. While most regulatory mandates are followed in letters, some are lost in administrative translations, and gaps arise in their practical implementation. For instance, the EMI limit is often watered down to an absolute value that defeats the purpose of mandating a FOIR. Overall, lenders seem rather preoccupied with disbursing as many loans as possible and ensuring repayment, and the ideal of providing appropriately sized, priced, and tenured loans is taking quite a backseat. Nevertheless, positive expectations around better data and better practices loom large, and lenders are proactive and keen about finding more suitable and appropriate underwriting processes and technology that would minimise credit and personnel risk for themselves while also helping customers access affordable and timely credit.
However, MFIs are seeing increasing competition from other players in the ecosystem like non-MFI NBFCs, MFI-like unregulated lenders, goal loan companies, FinTechs, etc. The sector has seen little innovation in product offerings despite the high diversity among its customer segment and the evolving needs of customers who are graduating from microloans. Realising the original intent and promise of microfinance and its potentially transformative but yet-to-be-fully realised impact would depend crucially on the MFI sector aligning with the underlying spirit of the new regulations, i.e., customer protection and fair play. This, over the long term, would ensure sustainable and stable growth of the sector and the people it serves.
Read the full report here.
Footnotes:
[1] The earlier regulations followed the Malegam Committee Report of 2011
[2] RBI Consultative Document on Regulation of Microfinance, 2021
