NABARD and RBI Strengthen Rural Financial Literacy

Context:

NABARD and RBI have undertaken coordinated efforts to enhance rural financial literacy and improve borrower protection in the microfinance sector.

Financial Literacy Initiatives:

RBI’s Centre for Financial Literacy (CFL) project (launched in 2017) has led to the establishment of 2,421 CFLs as of March 31, 2025; each CFL covers approximately three blocks.
NABARD supports Financial and Digital Literacy Camps and Village Level Programmes (VLPs) to promote awareness of banking services and SHG-bank linkage at the grassroots level.

Regulatory Framework for Microfinance Loans:

RBI has simplified the definition of microfinance loans: All collateral-free loans to households with annual income ? ?3 lakh are classified as microfinance loans.
RBI has removed earlier quantitative restrictions, such as minimum tenures and caps on loan cycles, and allowed greater flexibility in end-use, including non-income-generating purposes like education or medical needs.

Borrower Protection Measures:

A regulatory cap mandates that monthly loan repayments must not exceed 50% of household monthly income.
RBI has issued guidelines on fair recovery practices and mandated grievance redress mechanisms within Regulated Entities (REs).

Interest Rate Deregulation:

RBI issued a principle-based regulatory framework allowing REs to set board-approved interest rate policies; however, interest rates must not be usurious.

Role of SROs (Sa-Dhan& MFIN):

These Self-Regulatory Organizations monitor compliance by MFIs, restrict borrower over-indebtedness, and limit the number of lenders per borrower.
They also serve as consultative platforms for regulatory policy formulation.

Credit Reporting and Transparency:

RBI mandates Credit Institutions (CIs) to report borrowers' income and credit data to Credit Information Companies (CICs).
This data helps in assessing borrower indebtedness and ensures compliance with the 50% repayment obligation limit.