RBI removes interest cap for microfinance loans

The Reserve Bank of India (RBI) has increased the eligibility criteria for microfinance loans for households with an annual income of up to Rs 3 lakh and removed the interest rate cap on such loans. It has also asked all lenders to have a board-approved policy on pricing.

In the final guidelines for microfinance loans issued on March 14, 2022, the RBI said it will examine the rates levied by lenders so that they do not charge usurious rates and has asked the lenders to put in place a ceiling on the pricing of loans and related fees.

Microfinance institutions are required to disclose pricing information to a potential borrower in a standardized simplified fact sheet. Further, the RBI has asked lenders to prominently display the details of the minimum, maximum and average interest rates charged on loans across all its offices in the literature issued by them and on its website.

Microfinance Loans

The regulator has also revised the definition of microfinance loans by increasing the loan cap. Collateral-free loans given to households with annual household income up to Rs 3 lakh will now be treated as microfinance loans. At present, the annual household income of a microfinance borrower does not exceed Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas.

The RBI has said that to ensure the collateral-free nature of the microfinance loan, the loan shall not be linked with a lien on the deposit account of the borrower.

“The computation of loan repayment obligations shall take into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralised 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,” the RBI said.

Further, for existing loans, if the outflow on account of repayment of monthly debt obligations of a family as a percentage of monthly household income exceeds the limit of 50 per cent, they will be allowed to mature. However, in such cases, no fresh loan will be provided to these households till the prescribed limit of 50 per cent is complied with.

No penalty on pre-pay of loan

Also, lenders will not be allowed to levy a penalty if the borrower decides to pre-pay its obligations. RBI said the penalty, if any, for delayed payment will be levied on the overdue amount and not on the entire loan amount.

The RBI also said that self-regulatory organizations and other associations may develop a common framework based on the indicative method for determining household income.

Regulated entities may adopt this framework suitably as per their requirements with the approval of their Board. And, every regulated entity shall compulsorily submit information regarding household income to credit information companies.

NBFC-MFIs will get the benefit of portfolio diversification 

The RBI has revised the minimum requirement for microfinance loans for NBFC-MFIs to 75 per cent assets from 85 per cent earlier, given the change in the microfinance loans definitions. This will allow NBFC-MFIs to diversify their portfolio and provide larger loans to mature clients.

RBI has also revised the norms for NBFCs that do not qualify as NBFC-MFIs to extend microfinance loans up to 25 per cent of their total assets from the earlier 10 per cent.