Reserve Bank of India rolls out regulatory framework for microfinance loans; applicable to all NBFCs including Microfinance Institutions and Housing Finance Companies; gains immediate effect

The Reserve Bank of India (“RBI”) has issued the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (“Master Direction”).

 

Applicability:

The provision of the Master Direction will apply to-

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

The above entities are referred to as “Regulated Entities” for the purpose of this Master Direction.

 

Key Takeaways:

 

1. Definition of Microfinance Loan:

 

A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to ₹3,00,000. 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

 

To ensure collateral-free nature of the microfinance loan, the loan shall not be linked with a lien on the deposit account of the borrower.

 

Please note- regulated Entities should have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement.

 

2. Each RE has to put in place a board-approved policy for assessment of household income. An indicative methodology for assessment of household income is provided has also been provided as Annex I.

 

3. 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.

 

4. Each Regulated Entity has to 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.

 

5. Limit on Loan Repayment Obligations of a Household:

 

Each Regulated Entity must 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.

 

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

 

Regulated entities have to provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the level of indebtedness. Besides, the RE shall also ascertain the same from other sources such as declaration from the borrowers, their bank account statements and local enquiries

 

6. Pricing of Loans:

 

Each RE shall put in place a board-approved policy regarding pricing of microfinance loans which shall, inter alia, cover the following:

• 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 range of spread of each component for a given category of borrowers; and
• A ceiling on the interest rate and all other charges applicable to the microfinance loans.

 

Each RE shall disclose pricing related information to a prospective borrower in a standardised simplified factsheet (in accordance with the illustration provided in Annex II of the Master Direction)

 

7. The Master Direction also provides Guidelines on Conduct towards Microfinance Borrowers and exemption for ‘Not for Profit’ Companies engaged in Microfinance Activities.

 

8. Net Owned Fund (NOF) Requirement:

 

Existing NBFC-MFIs shall adhere to the NOF glidepath indicated under paragraph 3.1 (a) of the Circular dated October 22, 2021 on ‘Scale Based Regulation

 

(SBR): A Revised Regulatory Framework for NBFCs’ as given below:

 

NBFCs	Current NOF	By March 31, 2025	By March 31, 2027
NBFC-MFI	₹5 crore (₹2 crore in NE Region)	₹7 crore (₹5 crore in NE Region)	₹10 crore

 

For a detailed read of the Master Direction, please refer to the hyperlink provided below-

 

Source: Reserve Bank of India