<h1 class="ql-align-center">Consultative Document on Regulation of Microfinance</h1> <h2>Context:</h2> <ul><li>RBI recently released Consultative Document on Regulation of Microfinance that aims to reassess the priorities of the sector</li></ul> <h2>Proposals in the document:</h2> <ul><li class="ql-align-justify">Gives a common definition i.e collateral-free&nbsp;lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh in urban areas should be considered as microfinance.</li></ul> <ul><li class="ql-align-justify">Caps loan repayment (principal and interest) for all outstanding loans of the household at 50% of household income.</li></ul> <ul><li class="ql-align-justify">All Regulated Entities have a board-approved policy for household income assessment.</li></ul> <ul><li class="ql-align-justify">No pre-payment penalty.</li></ul> <ul><li class="ql-align-justify">Greater flexibility of repayment frequency for all microfinance loans.</li></ul> <ul><li class="ql-align-justify">Prescribed criteria for exemption of ‘not for profit’ microfinance companies.</li></ul> <ul><li class="ql-align-justify">Alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs.</li></ul> <ul><li class="ql-align-justify">Introduction of a standard simplified fact sheet on the pricing of microfinance loans for better transparency.</li></ul> <ul><li class="ql-align-justify">Display of minimum, maximum and average interest rates charged on microfinance loans on the websites of regulated entities.</li></ul> <h2 class="ql-align-justify">Microfinance:</h2> <ul><li class="ql-align-justify">Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households.</li></ul> <ul><li class="ql-align-justify">In India, all loans that are below Rs. 1 lakh are considered microloans.</li></ul> <ul><li class="ql-align-justify">Based on the recommendations of&nbsp;the Malegam Committee, RBI introduced a comprehensive regulatory framework for NBFC-MFIs in 2011.</li></ul>