Microfinance Loans: RBI issues Master Direction 2022 for Regulatory Framework

A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to Rs300000 (Rupees Three Lakhs). For this purpose, the household shall mean an individual family unit, i.e., husband, wife, and their unmarried children. The collateral-free loan under microfinance shall be irrespective of end-use and mode of application/ processing/ disbursal (either through physical or digital channels). These loans shall not be linked with a lien on the deposit account of the borrower.

Loan Eligibility:

For borrowers of rural households, annual income shall not exceed Rs 125000/-(Rupees One lakh twenty-five thousand) and for urban and semi-urban households annual income shall not exceed Rs 200000/-.(Rupees Two Lakh).

Minimum 50 percent of the aggregate amount of loans granted shall be for income generation activities.

The total indebtedness of the borrower shall not exceed Rs125000 (excluding loan for education and medical expenses);

Quantum Loan:

The loan amount shall not exceed Rs75000 in the first cycle and Rs125000 in subsequent cycles;

Repayment period:

 Minimum tenure of 24 months for loan amount exceeding Rs30000; However, prepayment penalty should not be levied, if the borrower closes the loan in advance.

Repayment periodicity:  weekly, fortnightly, or monthly / shall be flexible at borrower’s choice.

Assessment of Loan:

Composition of the household:     (a) Number of earning members and   (b) Number of non-earning members

Assessment of household income:

1. Primary source of income:     

The sector of work: Agriculture & allied activities, trading, manufacturing, services, etc

Nature of work: Self-employed or salaried, regular or seasonal, etc.( .( Frequency of income: daily/ weekly/ monthly )

Average monthly income (to be derived from the below:

1. Months/ days of employment over last one year
2.  Self-reported monthly income

b) Other sources of income:     Remittance,     Rent/ Lease,     Pension,     Government transfer,    Scholarship,    Others (specify details)

c) The income assessment as above may be carried out for all earning members with respect to all sources (primary or secondary) of income. While assessing the income of all members from all sources, it may be ensured that there is no double-counting of income such as counting of salary income of one migrant member also as remittance income for the household.

d) While the income computation may be done on a monthly basis, the income assessment for all members and sources may be carried out over a period of a minimum of one year to ascertain the stability of the household income.

Parameters to capture household expenses:

Type of accommodation: (owned/ rented, etc.)

Availability of basic amenities: electricity, water, toilet, sewage, LPG connection, etc.

Availability of other assets: land, livestock, vehicle, furniture, smartphone, electronic items, etc.

Regular monthly expenses:  food, utilities, transport, house/ shop rent, clothing, regular medical costs, school/ college fees, etc.

Irregular expenses over the last year: medical expenses, house renovation, purchase of household goods, functions, etc.

Interest Rates:

A ceiling on the interest rate and all other charges applicable to the microfinance loans Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank.