Geopolitics extreme weather events to impact low earners MFIs must strengthen practices RBI DG

Mumbai, Nov 15 (PTI) Prolonged geopolitical challenges and extreme climate events may disproportionately impact low-income households, RBI Deputy Governor S C Murmu has said, asking microlenders to strengthen their practices.

     Addressing an event organised by microfinance institutions (MFIs') self-regulatory body MFIN on Saturday, Murmu also flagged the issue of interest rates, pointing out that the central bank has observed a northward movement in recent past, and stressed that competition in the sector must translate into "fair and competitive lending rates".

     Murmu also said the RBI will be undertaking a review of the income threshold, under which families earning up to Rs 3 lakh can avail microfinance loans but is not keen to revisit the Fixed Obligation to Income Ratio (FOIR), under which the monthly repayment is capped at 50 per cent of the monthly income.

     In the comments that come amid widespread concerns on the impact of the continuing wars in the Middle East and Ukraine, and also the deficient rainfall, which has led many states to declare drought, Murmu said such events weigh disproportionately on low-income households as low savings and inadequate cover against weather extremes come to prick.

     "It is imperative for the industry to strengthen its lending practices, uphold responsible credit standards and build greater resilience to withstand emerging challenges," the career central banker who is in charge of the regulation department, added.

     He said when the microfinance sector goes through a downturn, the consequences are far more enduring for such borrowers, warning that a loss of access to credit, or an adverse credit history, can constrain someone's financial opportunities and livelihood for a long time to come.

     MFIs need to "deal effectively" with certain key issues, including over-indebtedness of borrowers, high interest rates charged by lenders, and harsh recovery practices, he said.

     The RBI is conscious of the social and economic importance of this sector, and has been shaping a regulatory architecture that helps build a responsible, resilient and sustainable microfinance sector, he said, underlining some of its concerns.

     "We are currently seeing an upward shift in the lending rates charged on microfinance loans by all categories of regulated entities, partly driven by higher credit costs in the preceding quarters. The freedom to determine lending rates carries with it a responsibility -- to ensure that pricing is transparent, reasonable and justifiable," Murmu said.

     Noting that banks, non-banks and also dedicated MFIs extend microloans, he said the competition ought to translate into "fair and competitive lending rates".

     Underlining that customer protection and business growth are not conflicting objectives but mutually reinforcing imperatives that must progress together, Murmu said the customer should be the central focus for entities as they pursue growth and profitability.

     Murmu said a key facts statement (KFS) must be provided before the loan contract is executed, its contents explained, and an acknowledgement of the borrower's understanding obtained and added that we need to distinguish between mindful consent and what may be termed "pseudo consent", where borrowers sign every document without adequate information on what it contains.

     He also flagged the issue of an increase in average ticket sizes observed lately, pointing out that this is the result of lenders' preference for borrowers with credit histories.

     However, the same also runs the risk of over-indebtedness, including the practice of taking larger loans to repay existing obligations, and the potential overstatement of household income to enhance loan eligibility.

     An excessive focus on existing borrowers may exclude new-to-credit households from the formal financial system, he said, warning that meaningful financial inclusion must both broaden and deepen access to financial services.

     Industry must adopt a balanced and inclusive approach that serves both existing and first-time borrowers, while maintaining responsible credit delivery and sustainable growth, he said.

     The RBI has observed "divergent practices" in the reporting of microfinance loans, Murmu said, noting that banks have been reporting some microfinance loans in the consumer segment while some credit institutions usually report these loans in the microfinance segment of credit information companies.

     To ensure accurate and robust reporting by all credit institutions, CICs have been advised to disable the option of microfinance reporting in the consumer segment and to migrate the relevant data to the microfinance segment within a stipulated time, he added.

(This story has not been edited by THE WEEK and is auto-generated from PTI)