MICROFINANCE FRAMEWORK


Regulatory Framework for Microfinance Loans

RBI Framework

All collateral-free loans to individual/s belonging to low-income households, i.e., households having annual income up to ₹3,00,000 are treated as microfinance loans. Reserve Bank of India has stipulated strict guidelines for microfinance loans. Here are the FAQ:


What should a customer keep in mind while availing a microfinance loan?

The customer should keep in mind, among others, the following:
  • There is no requirement of keeping any deposit/ margin/ collateral/ primary security with the lender at any stage of the microfinance loan.
  • Lender is required to provide a loan card to the borrower in a language understood by the borrower which should have following information:

Information which adequately identifies the borrower;

Simplified factsheet on pricing;

All other terms and conditions attached to the loan;

Acknowledgements by the lender of all repayments including instalments received and the final discharge; and

Details of the grievance redress system, including the name and contact number of the nodal officer of the lender.

Purchase of any non-credit products is purely voluntary. Fee structure for such products shall be explicitly communicated in the loan card.

Training provided by the lenders is free of cost.

What are the charges that a customer is required to pay for a microfinance loan?

A customer is required to pay only those charges which are explicitly mentioned in the factsheet provided by the lender. Besides this, the customer should also note the following:

  • There is no pre-payment penalty on microfinance loans.
  • Penalty, if any, for delayed payment can be applied only on the overdue amount and not on the entire loan amount.
  • Any change in interest rate or any other charge shall be informed to the borrower in writing well in advance and these changes shall be effective only prospectively.

How can a borrower find about the current interest rates being charged on the microfinance loans?

RBI has made it mandatory for lenders to display the minimum, maximum and average interest rates charged on microfinance loans in all their offices, in the literature (information booklets/ pamphlets) issued by them and details on their website.

Whether all members of a household are mandatorily required to become borrowers of a microfinance loan?

The directions require assessment of income and indebtedness at household level. There is no requirement of treating all members of the household as applicants/ borrowers of a loan which can be provided to an individual member. Board-approved policies of REs may include the methodologies/ operational frameworks to assess income and indebtedness of all members of the household.

Whether loans for consumption (i.e., for buying gadgets, meeting expenses on ceremonies, etc.) without collateral would be treated as microfinance loans?

Ans. All collateral-free loans to individual/s belonging to low-income households, i.e., households having annual income up to ₹3,00,000 are treated as microfinance loans.

If a loan is backed by hypothecation of any security (gold, equipment, white goods, underlying assets etc.), will this loan be considered collateral-free and classified as a microfinance loan?

Ans. Loans backed by hypothecation of any security shall not be treated as microfinance loans.

Whether the instructions related to limit of 50 per cent on monthly loan repayment obligations of a household as a percentage of monthly household income apply to non-microfinance loans given to low-income households?

Yes, for providing a non-microfinance loan to a low-income household (as defined under the directions), it should be ensured that the limit of 50 per cent on monthly loan repayment obligations of a household as a percentage of monthly household income is not breached. In other words, the limit of 50 per cent shall include both microfinance as well as non-microfinance loans.

Is the practice of calling a borrower before 9.00 am and after 6.00 pm being considered as harsh practice only for recovery of overdue loans or also for normal conduct of business?

This clause is applicable only for recovery from borrowers having overdue loans. For other borrowers, REs can continue with the existing timing/ process for business like group meetings, collection in regular accounts, etc. as per borrowers’ convenience.

Is there any specific reason for including a dedicated mechanism for redressal of recovery related grievances when there is already a customer grievance redress mechanism?

The purpose of having a dedicated redress mechanism for recovery related grievances is that these grievances should be promptly addressed. Treating (clubbing) them as (with) other complaints (e.g., operational issues) may result in delayed action. However, this does not imply that a separate redress mechanism for recovery related grievances is being mandated. REs can restructure/ re-organise the existing customer grievance redress mechanism to identify and promptly address recovery related grievances.

Is the regulatory framework for microfinance loans applicable to all entities operating in the microfinance sector including trusts and societies?

The regulatory framework for microfinance loans is applicable only to REs/ entities as defined under para 2.14 and para 9.25 of the directions. However, it may be prudent for other lenders operating in the microfinance sector to follow these customer-centric directions.

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