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Summary: RBI’s proposed guidelines for microfinance lenders

We missed this earlier: The Reserve Bank of India (RBI) on June 14 issued a consultative document prescribing new regulatory frameworks for various lenders in the microfinance space. Why this matters? Microfinance is a form of financial service which provides small loans to low-income households. Microfinance through mobile apps has become popular in recent years. But since this space is not well regulated, it poses various concerns (mentioned below). The proposed guidelines will address some of these concerns. The RBI is seeking comments and suggestions on these proposed guidelines from banks, NBFCs including NBFC-MFIs, industry associations, and other stakeholders by July 31, 2021. Who are the proposed guidelines applicable to? Extends from NBFC-MFIs to all lenders: While the earlier guidelines specifically applied to Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs), the new guidelines target all regulated entities (REs) under RBI. "The [current] comprehensive regulatory framework is applicable only to NBFC-MFIs, whereas other lenders, which comprise of around 70 percent share in the microfinance portfolio, are not subjected to similar regulatory conditions," RBI stated as the reason for making this change. This means banks, all NBFCs, and any other regulated entity offering microfinance come under the purview of the proposed guidelines. Does it apply to loan-lending apps? The consultation report does not explicitly mention loan-lending apps. These apps work on multiple models. Some have NBFC licenses of their own while others partner with banks or NBFCs to offer loans to customers. If they do offer loans or partner with a regulated entity to do so, then the proposed guidelines…

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