New Delhi, Nov 15: Interest rates on microfinance loans are rising across all categories of regulated lenders, Reserve Bank of India (RBI) Deputy Governor Shirish Chandra Murmu said, urging lenders to keep their pricing transparent and reasonable.

“We are currently seeing an upward shift in the lending rates charged on microfinance loans by all categories of regulated entities, partly driven by higher credit costs in the preceding quarters,” Murmu said in his keynote address at a Microfinance Institutions Network (MFIN) event in Mumbai on November 13.

Under RBI rules, regulated lenders must have a board-approved model for setting microfinance interest rates. The model takes into account factors such as the cost of funds and the risk of lending, and must include an internal ceiling on interest rates and other charges.

“The freedom to determine lending rates carries with it a responsibility – to ensure that pricing is transparent, reasonable and justifiable,” Murmu said.

He identified high interest rates, excessive borrowing and harsh recovery practices as three issues the sector needs to address. He also stressed that lenders must give borrowers a Key Facts Statement before they sign the loan agreement, explain its contents in a language they understand and obtain their acknowledgement that they have understood it.

“Mindful consent equips borrowers with the information they need to make an informed decision,” he said, cautioning against treating a borrower’s signature as a formality.

Murmu also flagged the steady rise in the average size of microfinance loans. He said lenders should watch for borrowers taking larger loans to repay existing debt and for household incomes being overstated to qualify for bigger loans.

Under RBI’s microfinance framework, households earning up to Rs 3 lakh a year are eligible for microfinance loans, and their total monthly loan repayments are capped at 50 per cent of household income. The industry has asked the RBI to count only the interest portion of certain loans when calculating the repayment burden. Murmu cautioned that easing the calculation would understate household debt and called the existing cap “already a liberal threshold”, given the limited financial cushion of low-income households. (ANI)