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What is the regulatory framework for microfinance loans?

Reserve Bank of India (RBI) has published the regulatory framework for microfinance loans.

From when is the framework applicable?

The regulatory framework is applicable with effect from April 01, 2022.

Which entities are covered in the framework?

The regulatory framework is applicable to the following regulated entities (REs) –

  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.
  3. All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies).

What is 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 means 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 (through physical / digital channels), provided to low-income households, i.e., households having annual income up to ₹3,00,000, to be considered as microfinance loans.
  • To ensure collateral-free nature of the microfinance loan, the loan should not be linked with a lien on the deposit account of the borrower.
  • The REs shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement.

How household income is assessed?

  • Each RE shall put in place a board-approved policy for assessment of household income. 
  • Self-regulatory organisations (SROs) and other associations / agencies may also develop a common framework based on the indicative methodology provided by Reserve Bank of India (RBI). The REs may adopt / modify this framework suitably as per their requirements with approval of their boards.
  • Each RE shall mandatorily submit information regarding household income to the Credit Information Companies (CICs). 
What shall be the limit on loan repayment obligations of a household?
  • 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% 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% 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.
  • 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%, shall be allowed to mature. However, in such cases, no new loans shall be provided to these households till the prescribed limit of 50% is complied with.
  • Each RE shall provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the level of indebtedness. 

How shall pricing of loans be fixed?

  • Each RE shall put in place a board-approved policy regarding pricing of microfinance loans.
  • There shall be no pre-payment penalty on microfinance loans. 
  • Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

What are the revised guidelines on qualifying assets of NBFC-MFI?

The 'qualifying assets' criteria for Non-Banking Financial Companies - Microfinance Institution (NBFC-MFI) is as follows –

Earlier guidelines Revised guidelines
NBFC-MFI is required to have minimum 85% of its net assets as ‘qualifying assets’. The definition of ‘qualifying assets’ is now being aligned with the definition of ‘microfinance loans’.
The minimum requirement of microfinance loans for NBFC-MFIs stands revised to 75% of the total assets.
NBFC that does not qualify as NBFC-MFI, cannot extend microfinance loans exceeding 10% of its total assets. The maximum limit on microfinance loans for such NBFCs (i.e., NBFCs other than NBFC-MFIs) now stands revised to 25% of the total assets.

What are exemptions for ‘Not for Profit’ Companies engaged in Microfinance Activities?

  • The definition of microfinance loans for ‘not for profit’ companies (registered under Section 8 of Companies Act, 2013) is now aligned with the revised definition of microfinance loans viz., collateral-free loans to households with annual household income up to ₹3,00,000, provided the monthly loan obligations of a household does not exceed 50% of the monthly household income.
  • Exemptions from Sections 45-IA, 45-IB and 45-IC of Reserve Bank of India Act, 1934 have been withdrawn for those ‘not for profit’ companies engaged in microfinance activities that have asset size of ₹100 crore and above.
    • Section 45-IA – Requirement of registration as an NBFC.
    • Section 45-IB – Maintenance of a certain percentage of outstanding deposits in approved securities by deposit taking NBFCs.
    • Section 45-IC – Transfer of 20% of net profit to reserve fund.
  • ‘Not for profit’ companies that are not eligible for the exemptions are required to register as NBFC-MFIs and adhere to the regulations applicable to NBFC-MFIs. 

What are Net Owned Fund (NOF) requirements for NBFC-MFIs?

Existing NBFC-MFIs shall adhere to the Net Owned Fund (NOF) glidepath indicated in the circular on ‘Scale Based Regulation (SBR) – A Revised Regulatory Framework for NBFCs’ dated October 22, 2021 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


References

Reserve Bank of India. (2022, March 14). 'Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (Updated as on July 25, 2022)'. Retrieved from https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12256


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