RBI issues Regulatory Framework for Microfinance Loans

The Reserve Bank has issued Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 for regulating microfinance loans. The Directions will come into force from April 01, 2022.

Key Points:

• Applicability: The provisions of these directions shall apply to the following entities

1. 1. All Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks) excluding Payments Banks;
   2. All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks; and
   3. All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies).

• Assessment of Household Income:

1. 1. Each RE shall put in place a board-approved policy for assessment of household income.
   2. 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 approval of their boards.
   3. Each RE shall mandatorily submit information regarding household income to the Credit Information Companies (CICs).

• Limit on Loan Repayment Obligations of a Household

1. 1. Each RE shall have a board-approved policy regarding the limit on the outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income. This shall be subject to a limit of maximum 50 per cent of the monthly household income.
   2. 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 component) towards all existing loans as well as the loan under consideration.
   3. 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.

• Pricing of Loans:

1. 1. Each RE shall put in place a board-approved policy regarding pricing of microfinance loans.
   2. Interest rates and other charges/ fees on microfinance loans should not be usurious subjected to supervisory scrutiny by the Reserve Bank.
   3. Any fees to be charged to the microfinance borrower by the RE and/ or its partner/ agent shall be explicitly disclosed in the factsheet.
   4. Each RE shall prominently display the minimum, maximum and average interest rates charged on microfinance loans in all its offices, in the literature (information booklets/ pamphlets) issued by it and details on its website.

• Qualifying Assets Criteria: The minimum requirement of microfinance loans for NBFC-MFIs also stands revised to 75 per cent of the total assets.