Reserve Bank of India removes interest cap for microfinance loans

Annual income criteria for loans hiked to Rs 3 lakh

The Reserve Bank of India (RBI) has increased eligibility criteria for microfinance loans to a household having an annual income of up to Rs 3 lakh while removing the interest rate cap on such loans. It has also asked all lenders to put in place a board-approved policy on pricing.

In the final guidelines for microfinance loans released on Monday, the RBI said it will scrutinise the rates charged by the lenders so that they do not charge usurious rates, and has asked the lenders to put in place a ceiling on pricing of loans and related fees.

The microfinance institutions are required to disclose pricing-related information to a prospective borrower in a standardised simplified fact sheet. Further, the RBI has asked the lenders to prominently display the minimum, maximum, and average interest rates charged on loans in all its offices, in the literature issued by them, and details on its website.

The regulator has also revised the definition of microfinance loans by increasing the loan cap. Collateral-free loan given to a household having annual household income up to Rs 3 lakh will now be considered as microfinance loan. Currently, a microfinance borrower is identified by the annual household income not exceeding Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas.

“All collateral-free loans, irrespective of end use and mode of application/processing/disbursal, provided to low-income ho¬u¬seholds, i.e., households having ann¬ual income up to Rs 300,000, shall be considered as microfinance loans,” the RBI said. The RBI has also said that to ensure collateral-free nature of the microfinance loan, the loan shall not be linked with a li¬en on the deposit account of the borrower.

“The framework will address issues of over indebtedness and multiple lending, which were of paramount concerns for the sector,” said Alok Misra, chief executive officer (CEO) and director, MFIN.

“More importantly, the RBI has taken a prudent view of the bottlenecks that are presented in credit delivery, addressing each of them. Revision of household income is a very progressive move with far-reaching implications as needier and low-income households will now come into the purview of accessible credit, taking us closer to our financial inclusion goal,” Misra said.

Chandra Shekhar Ghosh, managing director and CEO of Bandhan Bank, said the latest guidelines are a strong reflection of the maturity that the microcredit industry has reached in India. “It will help harmonise the regulatory framework for different types of lenders, encourage healthy competition and enable customers to make an informed choice regarding their credit needs.”

The RBI also said the regulated entities should have board-approved policy to ensure that the outflows of a household on account of repayment of monthly loan obligations should not exceed 50 per cent of the income of the household.

“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.

Also, for existing loans, if outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income exceeds the limit of 50 per cent, then they 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.

Further, the lenders will not be allowed to charge a penalty if the borrower decides to pre-pay their obligations. Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount, the RBI said.

The RBI also said self-regulatory organisations and other associations may develop a common framework based on the indicative methodology to determine the household income.

The regulated entities may adopt this framework suitably as per their requirements with approval of their boards. And, each regulated entity shall mandatorily submit information regarding household income to the credit information companies.

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.

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