Is microfinance legal in India?

Legal Structure of MicroFinance Business In India, ideally, any finance business is authorised only to Non-Banking Finance Companies (NBFC). However, some business forms have been given exemption by the Reserve Bank of India (RBI) to do finance activities up to a certain extent.

How are MFIs regulated in India?

Currently there is no regulator that oversees NGO-MFIs, Cooperatives, and Section 25s. RBI is the regulator for NBFCs. Since NBFCs encompass many types of financial institutions, microfinance institutions operating as NBFCs are subject to no specific regulation relating to lending, pricing, or operations.

What are the main constraints faced in microfinance?

key challenges facing microfinance businesses are improper regulations, increased competition from the formal banking sector, instability, limited management capacity, political interference, high transaction cost, inadequate investment in agriculture development.

Who regulates microfinance companies in India?

The Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) shall regulate the micro finance sector; it may set an upper limit on the lending rate and margins of Micro Finance Institutions (MFIs).

How is the RBI Act relevant for development of microfinance in India?

The Act stops MFIs from collecting old loans and originating new loans until the institution registers with the district authorities where they operate. The Act also mandates an interest rate cap such that the total interest charge cannot exceed the principal amount of the loan.

How many microfinance are there in India?

India’s microfinance sector is fragmented with more than 3000 microfinance companies (MGIs), NGOs and NGO-MFIs. The top 10 microfinance companies in India are estimated to account for almost 74 per cent of the total loans outstanding.

What are the RBI guidelines for MFI?

Under the RBI rules for MFIs, a microfinance borrower is identified by annual household income not exceeding Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas. The RBI said the same criterion should be extended to all regulated entities for the purpose of the common definition.

What are the problems of microfinance in India?

The microfinance sector gives loans without collateral, which increases the risk of bad debts. Fast-paced growth needs proper infrastructural planning, in which the Indian microfinance sector evidently lacks. Further, the lack of any apex control over the MFIs in India is also a leading cause of over-indebtedness.

Why is it important to regulate the micro finance institutions?

Although the primary purpose of this act is to protect the vulnerable section from usurious interest rates that moneylenders charge, some states have applied the act to Societies and Trusts also to restrict their lending activity. Other states have applied the Money Lending Act to other forms of MFIs.