- Micro Finance Institutions (MFIs) are set to implement SANKALP 2.0, a revised set of guidelines aimed at ensuring responsible lending practices.
- The new framework categorizes reforms under three major areas — loan pricing, over-indebtedness, and lending discipline.
Key Provisions of SANKALP 2.0 Guidelines
- Transparent Loan Pricing: MFIs must adopt clear pricing policies with interest rates that are board-approved and justifiable.
- Control on Over-Indebtedness: Borrowers can avail microfinance loans from a maximum of three lenders, including all institutional sources.
- Discipline and Conduct: Clients in default for over 60 days with any lender will not be eligible for new loans.
What is Microfinance or Microcredit?
- Microfinance refers to the provision of small-sized loans and financial services to low-income individuals or groups lacking access to formal banking.
- MFIs not only offer microcredit, but also provide savings accounts, fund transfer services, and micro-insurance to underserved populations.
- The concept gained global attention with the establishment of Grameen Bank in 1983 by Muhammad Yunus, a Bangladeshi social entrepreneur.
Challenges Faced by Microfinance Institutions (MFIs)
- Lack of Collateral: Loans are offered without any security, increasing repayment risks for MFIs.
- High Interest Rates: MFIs typically charge between 12% to 30%, compared to 8% to 12% by commercial banks.
- Operational Burden: Managing a large number of small borrowers results in higher transaction and servicing costs.
Major Regulatory Steps for MFI Sector in India
- Self-Regulatory Organizations (SROs): RBI recognized MFIN and Sa-Dhan as official SROs for MFIs in 2014 to ensure compliance and discipline.
- RBI’s 2022 Regulatory Framework: Introduced a uniform definition of microfinance loans, specified repayment caps, and enhanced borrower protection norms.
