Microfinance institutions can now set interest rates

Reference News:-

The Reserve Bank of India (RBI) allowed microfinance institutions the freedom to set interest rates on the loans that they lend.

Key takeaways

The guidelines will take effect from 1st April 2022.
The RBI tweaked the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh.
- Earlier, the upper limits were Rs. 1.2 lakh for rural borrowers and Rs. 2 lakh for urban borrowers.
There shall be no prepayment penalty on microfinance loans.
Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

Microfinance institutions

Microfinance offers a solution to small business owners, who do not have access to banking and associated services.
These institutions offer services similar to that of a bank.
They do charge interest on loans but the interest rate is lower than that charged by most banks in the country.
They help small- and medium-sized businesses scale up with access to funds at the right time.
They worked as an alternative, with an aim to create financial equality.
In India, there are two channels through which microfinance operates:
- SHG – Bank Linkage Programme (SBLP)
- Microfinance Institutions (MFIs)