The Reserve Bank on Monday proposed a uniform regulatory framework for the microfinance sector, wherein MFIs can provide collateral-free loans to households at board-determined interest rates.

Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households.

The key proposals of the “Consultative Document on Regulation of Microfinance” include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, and a board approved policy for household income assessment.

It also suggests non requirement of collateral and greater flexibility of repayment frequency for all microfinance loans.

According to the consultative paper released by the RBI on Monday, a microfinance loan would mean collateral-free lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh in urban and semi-urban centres.

The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans. They will also be required to disclose pricing related information in a standard simplified fact-sheet.

There will be no-prepayment penalty, said the consultative paper on which the RBI has invited comments from the stakeholders by July 31.

On pricing related guidelines, the paper proposed that the board of each NBFC-MFI shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances.