In June 2021, the Reserve Bank of India (RBI) published a “Consultative Document on Regulation of Microfinance”. While the declared objective of this review is to promote the financial inclusion of the poor and competition among lenders, the likely impact of the recommendations is unfavourable of the poor.

However, if the recommendations of the document are implemented, it will result in an expansion of microfinance lending by private financial institutions, in the provision of credit at high rates of interest to the poor, and in huge profits for private lenders.


Microfinance is a tool to promote financial inclusion, enable the households to come out of poverty and increase their income levels.

Microfinance institution provides easy credit and offer small loans to customers, without any collateral.

What are the recommendations mentioned in Consultative Document?

1. It recommends that the current ceiling on rate of interest charged by Non-Banking Finance Company- Microfinance Institutions (NBFC-MFIs) or regulated private microfinance companies needs to be done away with, as it is biased against one lender (NBFC-MFIs) among the many (commercial banks, small finance banks, and NBFCs).

2. It proposes that the rate of interest be determined by the governing board of each agency, and assumes that “competitive forces” will bring down interest rates.

3. RBI abandoned any initiative to expand low cost credit through public sector commercial banks to the rural poor, the bulk of whom rural women.

4. It also proposes to de-regulate the rate of interest charged by private micro-finance agencies.

5. According to current guidelines, ‘the maximum rate of interest charged by an NBFCI-MFI shall be the lower of the following:

i) the cost of funds plus a margin of 10% for larger MFIs (a loan portfolio of over 100 crore) and 12% for others.

ii) The average base rate of the five largest commercial banks multiplied by 2.75’.

 In June 2021, the average base rate announced by the RBI was 7.98%.

MICROFINANCE: Necessary for rural households

1. Microfinance is becoming increasingly important in the loan portfolio of poorer rural households.

2. There was a clear differentiation by caste and socio-economic class in terms of source and purpose of borrowing

i) Unsecured microfinance loans from private financial agencies were of disproportionate significance to the poorest households- poor peasants, wage workers, persons from the Scheduled Caste and Most Backward Classes.

ii) Microfinance loans were rarely for productive activity and almost never for any group-based enterprise, but mainly for house improvement and meeting basic consumption needs.

3. Data showed that poor borrowers took microfinance loans at reported rates of interest of 22% to 26% a year.

Whereas, the cooperatives and public sector banks are providing loans at much lower interest rates. For instance, Kisan Credit Card loans from banks were charged 4% per annum after interest subvention of 5%.


1. A shift to the digital transactions refers only to the sanction of a loan, as repayment is entirely in cash.

Contrary to the RBI guidelines of “no recovery at the borrower’s residence”, collection was at the door step.

2. If the borrower is unable to pay the instalment, other members of the group have to contribute, with the group leader taking responsibility.

3. The actual cost of microfinance loans is even higher for several reasons-

i) an official flat rate of interest used to calculate equal monthly instalments actually implies a rising effective rate of interest overtime.

ii) a processing fee of 1% is added and the insurance premium is deducted from the principal. As the principal is insured in case of death or default of the borrower or spouse, there can be no argument that a high interest rate is in response to a high risk or default.

Way Forward

1. Reserve Bank of India should encourage all institutions to monitor their impact on society by means of a “social impact score card”

2. Microfinance institutions should ensure that the “stated purpose of loan” that is often asked from customers at the loan- application stage is verified at the end of the tenure of loan.

3. Microfinance institutions need to focus on creating a sustainable and scalable microfinance model.


The proposals in the RBIs consultative document will lead to a further privatization of rural credit, reducing the share of direct and cheap credit from banks and leaving poor borrowers at the mercy of private financial agencies. To meet the credit need of poorer household, we need a policy reversal: strengthening of PSBs and firm regulation of private entities

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