RESERVE BANK OF INDIA (REGULATORY FRAME WORK FOR MICROFINANCE) DIRECTIONS, 2022

[Mr. M. GOVINDARAJAN]

The Reserve Bank has released a discussion paper on Revised Regulatory Framework for NBFCs – A Scale Based Approach. Taking into consideration the constantly evolving milieu in the financial sector, it was proposed to review the regulatory framework for Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs). There is a case for having a framework which is uniformly applicable to all regulated lenders in the microfinance space including scheduled commercial banks, small finance banks and NBFC-Investment and Credit Companies, rather than prescribing these guidelines for NBFC-MFIs alone. Accordingly, the RBI will come out with a consultative document harmonizing the regulatory frameworks for various regulated lenders in the microfinance space in March 2021.

The RBI issued directions namely ‘Reserve Bank of India (Regulatory Framework for Microfinance) Directions, 2022 on 14.03.2022.  These directions will come into effect from 01.04.2022. 

Applicability

The provisions of these directions are applicable to-

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

The above are called as ‘Regulated Entity’ (‘RE’ for short).

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.  The household shall mean an individual family unit, i.e., husband, wife and their unmarried children.

These loans will be provided to low income households having annual income up to ₹ 3 lakhs.  These loans are called as microfinance.  These loans are given collateral free, irrespective of the end use and mode of application/processing/disbursal.  These loans shall 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.

Assessment of household income

For undertaking the income assessment of a low-income household, information related to following parameters may be captured by the lender-

• Parameters to capture household profile;
• Parameters to capture household income;
• Parameters to capture household expenses.

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.

Limit on repayment of loan

Each RE has to obtain a Board approved policy on the limit of repayment of the loan by the household as a percentage of monthly household income.  This limit is subject to 50% of the monthly household income.  This repayment includes both the Principal and interest components towards the existing loan 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 per cent is complied with.

Pricing of loan

The pricing of loan shall contain the following-

• A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
• 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;
• The range of spread of each component for a given category of borrowers; and
• A ceiling on the interest rate and all other charges applicable to the microfinance loans.

Interest rates and other charges/ fees on microfinance loans shall be subjected to supervisory scrutiny by the RBI. 

Disclosure of pricing information

RE shall disclose pricing related information to a prospective borrower in a standardized simplified factsheet as detailed below-

• Loan amount (amount disbursed to the borrower);
• Total interest charge during the entire tenure of the loan
• Other up-front charges (break-up of each component to be given); 
• Processing fees;
• Insurance charges;
• Others, if any;
• Net disbursed amount
• Total amount to be paid by the borrower;
• Effective annualized interest rate (in percentage) (computed on net disbursed amount using IRR approach and reducing balance method)
•  Loan term (in months);
• Repayment frequency by the borrower;
• Number of installments in repayment;
• Penal charges in case of delayed payments, if any;
• Other charges, if any.

Borrower shall not be charged any penalty on prepayment of loan at any time. The borrower shall not be charged any amount which is not explicitly mentioned in the factsheet.  The factsheet shall also be provided for other loans (i.e., collateralized loans) extended to borrowers from low-income households.

Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

Obligations of REs

Each RE shall prominently display the minimum, maximum and average interest rates charged on microfinance loans in all its offices, in the literature (information booklets/ pamphlets) issued by it and details on its website. This information shall also be included in the supervisory returns and subjected to supervisory scrutiny.

Any change in interest rate or any other charge shall be informed to the borrower well in advance. These changes shall be effective only prospectively.  RBI would also make available information regarding interest charged by REs on microfinance loans.

Conduct towards microfinance borrowers

• A fair practices code (FPC) based on these directions shall be put in place by all REs with the approval of their boards.
• It shall be displayed by the RE in all its offices and on its website.
• It should be issued in a language understood by the borrower.

Borrower card

Each RE shall provide a loan card to the borrower.  This card shall include the following entries in a language that can easily be understood by the borrower-

• Information which adequately identifies the borrower;
• Simplified factsheet on pricing;
• All other terms and conditions attached to the loan;
• Acknowledgements by the RE of all repayments including instalments received and the final discharge; and
• Details of the grievance redressal system, including the name and contact number of the nodal officer of the RE.

Issuance of non-credit products shall be with full consent of the borrowers and fee structure for such products shall be explicitly communicated to the borrower in the loan card itself.

Recovery of loans

Recovery shall be made at a designated/central designated places decided mutually by the borrower and the RE.  If the borrower fails to appear at the designated centre, then the field staff of RE shall be permitted to recover the amount from the resident or workplace of the borrower.  Any harsh method cannot be used by the RE or his agent in recovering the amount.  The following amounts to acting harsh-

• Use of threatening or abusive language;
• Persistently calling the borrower before 09.00 am or after 06.00 pm;
• Harassing relatives, friends, or co-workers of the borrower;
• Publishing the name of the borrowers;
• Use or threat of use of violence or other similar means to harm the borrower or borrower’s family/assets/reputation;
• Misleading the borrower about the extent of the debt or the consequences of non repayment.

The RE shall have mechanism for redressal of recovery related grievances.  The details of such mechanism shall be provided at the time of disbursement of loan itself.