RBI may frame rules to curb mis-selling by banks: Dy guv M Rajeshwar Rao
Mumbai, Jun 10, 2025
Synopsis
Speaking at an event on financial inclusion, Rao raised concerns about the persistent challenges the microfinance sector faces, including a vicious cycle of over-indebtedness, high interest rates, and harsh recovery practices. "While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist," he said.
The Reserve Bank of India (RBI) has once again flagged concerns over mis-selling of financial products such as insurance, and said it is considering framing guidelines to address the issue.
“The concern is that such mis-selling without regard to suitability and appropriateness would beget distrust in schemes aimed at providing a safety net to the low-income households by creating artificial boundaries,” RBI deputy governor M Rajeshwar Rao said on Monday. “We are examining whether it necessitates framing of guidelines to address mis-selling of financial products and services by regulated entities.”
The RBI has repeatedly expressed concern over the increasing instances of misselling of financial products by banks and financial institutions. The regulator is particularly alarmed by practices where customers, especially the elderly or financially illiterate, are sold complex or inappropriate investment products under the guise of fixed deposits or insurance.
The regulator was also critical of some lenders charging higher rates to microfinance borrowers despite having access to low-cost funds.
Speaking at an event on financial inclusion, Rao raised concerns about the persistent challenges the microfinance sector faces, including a vicious cycle of over-indebtedness, high interest rates, and harsh recovery practices.
“While some moderation in interest rates charged on microfinance loans has been observed in recent quarters, pockets of high interest rates and elevated margins continue to persist,” he said. “Even lenders having access to low-cost funds have been found to be charging margins significantly higher than the rest of the industry and which in several instances appear to be excessive.”
Rao urged lenders to look beyond the conventional ‘high-yielding business’ tag for the sector and approach it with an empathic and developmental perspective. Lenders should recognise the socio-economic role that microfinance plays in empowering vulnerable communities, he said.
Microfinance institutions often charge relatively high interest rates compared to traditional banks, with rates typically ranging from 20% to 28% per annum. These elevated rates are a point of concern, especially given that microfinance primarily targets low-income borrowers. However, lenders justify these higher charges to high cost of servicing small-ticket loans, operational expenses in remote areas, and elevated credit risks.
The RBI deputy governor observed that disruptions in the microfinance sector have increased in recent times.
“Incidents of high borrower indebtedness coupled with coercive recovery practices sometimes lead to tragic consequences,” he said. “It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided.”
Rao urged regulated entities to enhance their credit appraisal systems to prevent over-leveraging of borrowers. Lenders must stay away from engaging in unethical recovery practices and ensure that financial services are delivered in a manner that is both responsible and sustainable, he said.
While acknowledging that the microfinance business model may be fundamentally sound, he warned that structural flaws and incentive schemes could result in poor outcomes for consumers.
“The organisational structure and the incentive schemes framed to deliver the services may be flawed, resulting in perverse outcomes for customers. This calls for an introspection around the models,” Rao said.
[The Economic Times]
