Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022

Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022

Executive Summary:

This article describes:

• • • Applicability of Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022
    • What is microfinance loan, Limit on Loan Repayment Obligations of a Household, Pricing of Loan & Qualifying Assets Criteria

Introduction:

For regulating microfinance loans, the Reserve Bank of India published Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 which will be effective from 1st April, 2022. A microfinance loan is defined as a collateral-free loan given to a household having an annual income of up to Rs 3 lakh.

Applicability

These guidelines will apply to –

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

The above are called as ‘Regulated Entities (REs)’ for the purpose of these directions.

Key Highlights of Direction:

What is microfinance loan?

• A microfinance loan is a collateral-free loan issued to a family with an annual household income up to 3,00,000. The term “household” refers to individual family unit, such as a husband, wife, and their unmarried children.
• The loan shall not be associated with a lien on the borrower’s deposit account in order to ensure that the microfinance loan is collateral-free.
• The REs should have a board-approved policy that allows borrowers to choose their own repayment schedule for microfinance loans.

Household Income Assessment:
In order to begin an income assessment of low-income households, the lender may collect data on the following parameters:

• 1. parameters for capturing the profile of a household
• 2. household income parameters
• 3. parameters to collect household spending

Each RE is required to submit information about household income to the credit information company.

Limit on Loan Repayment Obligations of a Household:

• Each RE must seek board approved policy setting the loan repayment limit as a percentage of monthly household income. This limit is subject to 50% of the monthly household income. This payment covers both the principal and interest on the existing loan as well as the loan under consideration.
• Each RE must give the Credit Information Companies (CICs) with timely and accurate data and use the data they have to ensure compliance with the level of indebtedness. Before updating the assessed household income with CICs, the borrower/s must provide specific reasons for any differences between the previously reported household income and the assessed household income.

Pricing of loan:
The pricing of loan shall contain the following:

• 1. A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
• 2. 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;
• 3. limit on the interest rate and other fees that can be applied to microfinance loans.

Qualifying Assets Criteria:

• A Non-banking Financial Company-Microfinance Institution (NBFC-MFI) is required to have a minimum of 85% of its net assets as ‘qualifying assets’ under the previous qualifying assets criteria. NBFC-MFIs concept of ‘qualified assets’ is now being combined with the definition of microfinance loans mentioned in paragraph 3 of Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022. The minimum requirement of microfinance loans for NBFC-MFIs revised to 75% of the total assets.
• Previously, an NBFC that did not qualify as an NBFC-MFI could not provide microfinance loans worth more than 10% of its total assets. The maximum microfinance loan limit for such NBFCs (i.e., NBFCs that are not NBFC-MFIs) has been revised to 25% of total assets.

Guidelines related to the recovery of Loans–
The master direction specifies that regulated entities should use a generous approach while recovering loans. As part of the Fair Practice Code, regulated entities shall provide assistance and guidance to borrowers who are having difficulties.

Not For Profit Companies to register as NBFC-MFI–
The contents of this Master Direction apply to Not-for-Profit Companies that engage in Micro Finance Loans and are registered under Section 8 of the Companies Act, 2013. Not For Profit Companies with asset size of less than Rs. 100 Crore are now required to register as NBFC-MFI within three months of notification of this Master Direction.

Requirement of Net Owned Fund:
According to the RBI’s Scale Based Regulation for NBFCs, an NBFC- Microfinance Institution must have a Net Owned Fund of at least 10 crores. The Reserve Bank gives NBFCs a roadmap to meet the Net Owned Fund requirement by March 31, 2027.

Conclusion:

The Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, explained that all regulated entities (REs) should put in place a board-approved policy regarding microfinance loan pricing, which should include a ceiling on the interest rate and all other charges applicable to microfinance loans. The RBI has instructed regulated entities (REs) to ensure that a microfinance loan issued to a household with an annual household income of up to Rs. 3,00,000 is a collateral-free loan. A wide range of changes have been made to areas of household income assessment, loan repayment, pricing, and loan recovery guidelines.

Regards,
Legal Team

Proind Business Solutions Private Limited
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