Based on the feedback received on a consultative document on microfinance loan regulation that was issued for public comment on June 14, 2021, the Reserve Bank of India has now decided to implement microfinance loan guidelines.
The RBI has directed regulated entities (REs) to ensure that a microfinance loan is a collateral-free loan given to a household with an annual household income of up to ₹3,00,000. The loan should not be linked with a lien on the deposit account of the borrower.
Each RE should 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. The regulator capped the monthly loan repayment to a maximum of 50% of the monthly household income.
The computation of loan repayment obligations should take into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralized loans) of the household. Each RE should mandatorily submit information regarding household income to the Credit Information Companies (CICs).
These directions, part of RBI’s harmonious framework for all commercial banks (including SFBs, local area banks, and regional rural banks) excluding Payments Banks, all UCBs, DCCBs and NBFCs, to be effective from April 1, will be called the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022. These entities are referred to as regulated entities (REs).
Each RE should put in place a board-approved policy regarding pricing of microfinance loans which would cover 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, 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.
Interest rates and other charges/fees on microfinance loans should not be usurious, the RBI stated in a release.
