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:

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.

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.

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.

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.

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.

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.

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.

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.

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.