The central bank is removing the cap on interest rates and revising up the amount that can be flagged as a microfinance loan
The central bank is removing the cap on interest rates and revising up the amount that can be flagged as a microfinance loan
The Reserve Bank of India (RBI) on Monday granted microfinance institutions freedom to set the interest rates they charge borrowers, with the caveat that rates should not be usurious.
In the revised Microfinance Loan Guidelines, effective April 1, 2022, RBI has revised the definition of a microfinance loan to indicate an unsecured loan granted to a household with an annual income of up to ₹3 lakh. Previously, the caps were 1.2 lakh for rural borrowers and 2 lakh for urban borrowers.
Under the revised standards, Regulated Entities (REs) should adopt a board-approved policy related to microfinance loan pricing, an interest rate cap and any other fees applicable to microfinance loans.
“Revising the income cap to 3 lakh will expand market opportunities and removing the interest rate cap will encourage risk-based underwriting,” said Udaya Kumar Hebbar, MD and CEO of CreditAccess Grameen Ltd. “This reflects the confidence shown by headquarters. Trust in the ability of MFIs to operate responsibly at the bottom of the pyramid,” he said.
“Interest rates and other fees/fees on microfinance loans should not be exorbitant. These will be subject to a supervisory review by the Reserve Bank,” RBI said in its main office.
Previously, the interest rate cap was the lower of the following: average borrowing costs multiplied by 2.75; or funding costs plus 10%, according to microfinance industry executives.
Each RE must disclose rate-related information to a prospective borrower in a standardized, simplified factsheet, the RBI said.
“Any fees charged to the microfinance borrower by RE and/or its partner/agent will be explicitly disclosed in the fact sheet. The borrower will not be charged for any amounts not specifically stated in the factsheet,” she added.
No prepayment penalty is charged on microfinance loans. Any late payment penalty will be applied to the overdue amount rather than the entire loan amount, the regulator said.
Any change in the interest rate or other fee must be communicated to the borrower in a timely manner and these changes only apply prospectively, it said.
The RBI said that each RE would need to establish a mechanism to identify borrowers facing repayment difficulties, to liaise with such borrowers and provide them with the necessary guidance on the available recourse options.
“REs must have a due diligence process for the appointment of recovery officers, which should cover, among other things, the people involved in the recovery process,” it said.
In order to ensure proper notification and appropriate authorization, the RE will provide the borrower with the details of the collection agent while initiating the collection process.
Under the new standards, the minimum microfinance loan requirement for NBFC-MFIs will be revised to 75% of total assets.
Alok Misra, CEO & Director, MFIN, the association of microfinance companies, said: “The very comprehensive harmonized regulations will herald a new era/beginning for the microfinance sector, where a common regulatory framework will apply to all regulated entities of the RBI.”
“In addition to creating a level playing field, the framework will address issues of over-indebtedness and multiple lending, which have been of paramount concern to the sector. More importantly, RBI has prudently viewed the lending bottlenecks and addressed each of them.”
He said the household income overhaul is a progressive step with far-reaching implications as more needy low-income households would now come into the area of accessible credit, bringing us closer to our goal of financial inclusion.
