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Is RBI missing the wood for the trees? 

Money Control · 1m

The microfinance sector has experienced significant growth since the Reserve Bank of India (RBI) implemented new guidelines in 2022. However, the recent temporary ban on four NBFCs due to usurious loan pricing has caused shockwaves in the industry. The RBI's guidelines aimed to create a level playing field and lower the cost of credit for borrowers. However, challenges arise in determining household income in the informal sector, and there were no specific norms regarding interest rates. The ban could potentially lead to distrust and apprehension, which the RBI initially sought to prevent. Additionally, concerns over excessive growth in unsecured retail personal credit may be overblown, as defaults are unlikely to have systemic implications. The RBI is particularly wary of fintech NBFCs and digital lending. The shift to retail credit was driven by risk aversion, but if corporate demand picks up, retail credit may take a back seat. The RBI's strategies going forward remain to be seen.