Which of the following is the regulatory body for microfinance institutions in India?

The correct answer is Reserve Bank of India.

Key Points

• The Reserve Bank of India (RBI) is the primary regulatory authority for microfinance institutions (MFIs) in India.
• RBI regulates MFIs under its Non-Banking Financial Company (NBFC)-Microfinance Institutions framework.
• The RBI has established specific guidelines for NBFC-MFIs, including norms for lending practices, interest rates, and customer protection.
• Microfinance institutions play a vital role in providing financial services to low-income groups and underserved populations, and RBI ensures these operations adhere to ethical and sustainable practices.
• RBI periodically reviews and updates regulations for MFIs to ensure a balanced growth of the microfinance sector while safeguarding borrower interests.

Additional Information

• Microfinance:
  • Refers to financial services such as loans, savings, and insurance provided to low-income individuals or groups who lack access to traditional banking services.
  • It aims to empower economically disadvantaged populations and promote financial inclusion.
  • Microfinance institutions primarily focus on small loans, often without collateral, to support entrepreneurial ventures.
• NBFC-MFI:
  • Non-Banking Financial Companies categorized as Microfinance Institutions (NBFC-MFI) are regulated by the RBI.
  • To qualify as an NBFC-MFI, at least 85% of the assets must be in the form of microfinance loans.
  • Interest rates charged by NBFC-MFIs are capped by the RBI to ensure affordability for borrowers.
• Priority Sector Lending (PSL):
  • Microfinance falls under the Priority Sector Lending category, where banks are mandated by RBI to lend a certain proportion of their funds to priority sectors.
  • This ensures that credit is made available to marginalized sectors, including agriculture, micro-enterprises, and low-income groups.
• Key RBI Regulations for MFIs:
  • RBI mandates MFIs to follow a fair lending code to ensure borrower protection.
  • MFIs must adhere to a loan size limit and interest rate caps as prescribed by RBI.
  • Periodic reporting and audits are conducted by RBI to ensure compliance and transparency in operations.