RBI intends to make microlending collateral free: Report

The RBI has stated that it intends to make microlending collateral-free for all lenders, not just microfinance institutions (MFIs), according to a report in The Times of India. This comes as a result of non-MFIs enacting aggressive collection techniques, hence bridging the regulatory gap between MFIs and other lenders.

RBI deputy governor Rajeshwar Rao, speaking at the Sa-Dhan National Conference on ‘Revitalising Financial Inclusion,’ remarked that current policies have created a non-level playing field. “Only NBFC-MFIs are subject to the present regulatory system, which was put in place with the goal of making credit available to low-income people while also protecting borrowers from lenders’ severe collection methods. Other lenders, who now account for roughly 70% of the microfinance portfolio, are not subject to the same legal constraints, he explained.

Rao urged lenders to exercise caution and avoid copying large institutions because microlending serves a social purpose. “Prioritizing profitability at the expense of microfinance’s social and welfare goals may not be the best outcome.” “Lenders must keep in mind that balance sheet growth should not be achieved at the expense of cautious behaviour,” he warned.

Borrowers who take out microloans, according to Rao, lack the type of collateral that lenders desire. However, he pointed out that lenders continue to repossess whatever pledged collateral they have. “It’s more for enticing repayments than for recouping losses.”