All micro loans must be collateral-free - RBI

The RBI has said it proposes to make micro-lending collateral-free, not just for microfinance institutions (MFIs) but for all lenders. Delivering the inaugural address at the Sa-Dhan National Conference on 'Revitalising financial inclusion' on Wednesday, RBI deputy governor Rajeshwar Rao said that current regulations have created a non-level playing field.

He said that the current regulatory framework, which was put in place with the objective of making credit available to low-income households and to protect borrowers from harsh recovery practices of the lenders, is applicable only to NBFC-MFIs. Whereas other lenders, who now have a share of around 70% in the microfinance portfolio, are not subjected to similar regulatory conditions.

Rao asked lenders to be cautious and not to copy the large ones as microlending has a social objective. He said, Prioritisation of profitability at the expense of social and welfare goals of microfinance may not be an optimal outcome. Lenders need to remain cognizant of the fact that the balance sheet growth should not be built by compromising on prudent conduct.