RBI: New microfinance norms will bring down credit risk

The RBI has said that its regulations on microfinance are aimed at improving the credit worthiness of borrowers and enable them to raise loans at lower interest rates.

Under the new regulatory arrangement, rule-based guidelines on pricing of loans have been replaced with a principle-based framework based on enhanced disclosures and transparency requirements, deputy governor M Rajeshwar Rao said.

Speaking at an event, Rao elaborated the key elements of microfinance regulation aimed at bringing down the cost of credit for the borrower.

According to Rao, the cap on repayment obligations is expected to nudge lenders to keep the interest rates low so that the repayment instalments do not exceed the maximum prescribed limit for repayment obligation. Second, measures to check over-indebtedness would also result in improvement of creditworthiness of the borrowers, bringing down the credit-risk premium which should translate into lower interest rates.