Regulatory Framework for Microfinance Institutions

The Reserve Bank of India is the regulator of microfinance institutions in India. The RBI regulations are uniformly applicable to all microfinance lenders including banks, small finance banks, NBFC, and not-for-profit companies (regulated entities –RE).  

The provisions of Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022

The annual household income level increased to 3 lakh for classification of microfinance loans. Earlier, the income caps were kept at Rs 1.25 lakh in rural areas and Rs 2 lakh in urban and semi-urban areas. For this purpose, the household shall mean an individual family unit, i.e., husband, wife, and their unmarried children.

All collateral-free loans, irrespective of end use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households, i.e., households having annual income up to ₹3,00,000, shall be considered as microfinance loans. Each RE shall put in place a board-approved policy for the assessment of household income.

Self-regulatory organisations (SROs) and other associations/ agencies may also develop a common framework based on the indicative methodology. The REs may adopt/ modify this framework suitably as per their requirements with the approval of their boards.

Each RE shall mandatorily submit information regarding household income to the Credit Information Companies (CICs). Reasons for any divergence between the already reported household income and assessed household income shall be specifically ascertained from the borrower/s before updating the assessed household income with CICs. Further, each RE shall provide timely and accurate data to the CICs and use the data available to them to ensure compliance with the level of indebtedness. Besides, the RE shall also ascertain the same from other sources such as declarations from the borrowers, their bank account statements, and local enquiries.

The monthly loan repayment of borrowers should not exceed half the monthly household income. The rule of a 50% fixed obligation to income ratio being applied uniformly to all categories of borrowers will reduce the pressure, lower delinquency, and lower credit costs for the industry.

The computation of loan repayment obligations shall take into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralized loans) of the household. The outflows capped at 50 per cent of the monthly household income shall include repayments (including both principal as well as interest components) towards all existing loans as well as the loan under consideration.

The existing loans, for which outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income exceed the limit of 50 per cent, shall be allowed to mature. However, in such cases, no new loans shall be provided to these households till the prescribed limit of 50 per cent is complied with.

The REs shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirements.

Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank. Also, each RE has to disclose pricing-related information to a prospective borrower in a standardised simplified factsheet. Though the removal of the interest rate cap for microfinance institutions would allow these lenders to go for risk-based pricing, each regulated entity (RE) is required to have a board-approved policy for microfinance loan pricing. A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate; delineation of the components of the interest rate such as cost of funds, risk premium, and margin, etc. in terms of the quantum of each component based on objective parameters. The Reserve Bank will conduct supervisory examinations to ensure compliance.

Lending rates may be a little higher for new borrowers without credit history, while borrowers with robust repayment track records may enjoy softer rates.

The factsheet shall also be provided for other loans (i.e., collateralized loans) extended to borrowers from low-income households.

RBI has asked the lenders to prominently display the minimum, maximum, and average interest rates charged on loans in all its offices, in the literature (information booklets/ pamphlets) issued by it, and in detail on its website. REs shall disclose pricing-related information to a prospective borrower in a standardised simplified factsheet. All costs charged by the RE and/or its partner/agent to the microfinance borrower must be specified in the booklet. This information shall also be included in the supervisory returns and subjected to supervisory scrutiny.

There shall be no pre-payment penalty on microfinance loans. Penalty, if any, for delayed payment shall be applied to the overdue amount and not to the entire loan amount.

No loan can be linked to a lien on the deposit account of the borrower. The loan shall not be linked with a lien on the deposit account of the borrower. This is to ensure the collateral-free nature of the microfinance loan.

RBI removed certain exemptions applied to not-for-profit entities with Rs 100 crore and directed them to register as NBFC-MFIs to bring them within its ambit.

The RBI has revised the criteria for NBFCs who do not qualify as NBFC-MFIs to extend microfinance loans up to 25 per cent of their total assets from 10 per cent earlier.

As part of their awareness campaigns, SROs/ other industry associations may publish the range of interest rates on microfinance loans charged by their members operating in a district. SROs/ other industry associations may also sensitize their members against charging usurious interest rates.

 RBI would also make available information regarding interest charged by REs on microfinance loans.

Bank credit to MFIs extended for on-lending to individuals and also to members of SHGs / JLGs will be eligible for categorisation as priority sector advance under respective categories viz., Agriculture, Micro, Small and Medium Enterprises, and ‘Others’, provided not less than 85 percent of total assets of MFI.

A fair practices code (FPC) based on these directions shall be put in place by all REs with the approval of their boards. The RE shall display the FPC in all its offices and on the website. The FPC should be issued in a language understood by the borrower.

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