Mumbai, Nov 15 (SocialNews.XYZ) The Reserve Bank of India (RBI) will review the annual household income threshold of Rs 3 lakh for microfinance borrowers, Deputy Governor Shirish Chandra Murmu said, signalling a possible reconsideration of the existing regulatory limit amid demands from the industry for a revision.
Speaking at an event organised by the Microfinance Institutions Network (MFIN) here, Murmu said the central bank would assess the need for revising the threshold in light of developments in the microfinance sector.
He, however, stressed the need for microfinance institutions to strengthen their household income assessment and reporting mechanisms to ensure transparency and maintain credibility, cautioning against the potential misuse of any changes in regulatory norms.
Addressing another key demand of the industry to revise the 50 per cent cap on the household loan repayment-to-income ratio, also known as the fixed obligation-to-income ratio (FOIR), Murmu opposed the proposal to exclude the principal component of certain loans from the calculation.
He said such exclusions would undermine the objective of the regulatory safeguard, dilute its sanctity and lead to an underestimation of household indebtedness.
The 50 per cent cap is intended to protect borrowers from excessive debt obligations while ensuring that a reasonable portion of household income remains available for essential consumption and other living expenses, he said.
Murmu pointed out that the existing 50 per cent threshold was already a liberal limit, considering the limited financial cushion available to low-income households and their vulnerability to economic shocks.
Citing a recent study, he said the average microfinance borrower spends 18.7 per cent of monthly household income on loan repayments, while nearly two-thirds of the income is allocated towards consumption.
He also referred to NABARD's periodic Rural Economic Conditions and Sentiments Surveys, which indicate that consumption and other expenses account for around three-fourths of monthly household income, leaving the remaining portion for loan repayments and savings.
From a risk management perspective, the regulatory FOIR limit should be considered a prudential ceiling rather than a target that every household should utilise, Murmu said.
The RBI Deputy Governor also raised concerns over the steady increase in the average ticket size of microfinance loans, noting that larger loans were witnessing significant growth while demand for smaller loans appeared to be weakening.
Source: IANS
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