RBI has released Master Directions/ Regulatory Framework 2022 in respect of Microfinance Loans, after necessary review and inviting public suggestions/ comments, i.e. the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, which shall be applicable w.e.f. 01/04/2022.
What is Microfinance Loan? Definition/ Meaning
A microfinance loan is defined as a collateral-free loan given to a household having annual household income upto Rs. 3,00,000, whereas this limit was earlier fixed at Rs. 2 lacs and Rs. 1.6 Lacs for urban households and rural households, respectively. For this purpose, the household shall mean an individual family unit, i.e., husband, wife and their unmarried children.
All collateral-free loans, irrespective of end use of the loan funds and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households, having annual income up to Rs. 3,00,000, are considered as microfinance loans.
Scope of Applicability: RBI Master Directions 2022 for Microfinance Loans
The provisions of these directions shall apply to the following Regulated Entities (REs):
(i) All Commercial Banks, including Small Finance Banks (SFBs), Local Area Banks (LABs), and Regional Rural Banks (RRBs) but excluding the Payments Banks;
(ii) All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks; and
(iii) All Non-Banking Financial Companies (NBFCs), including Microfinance Institutions (MFIs) and Housing Finance Companies (HFCs).
Assessment of Household Income and Limit on Limit on Loan Repayment Obligations thereof
All REs are required to frame a policy approved by the Board, to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement, which shall cover policy for assessment of household income as well as a pre-defined limit on the monthly repayment outflows of a household as a percentage of the monthly household income, subject to cap limit of 50 per cent. Such framework can be modified suitably as per the requirements of the REs with approval of their boards. The methodology for assessment of household income, etc. has been explained by RBI in the Annexure I to the Above Notification.
REs are mandatorily required to submit timely and accurate information regarding household income to the Credit Information Companies (CICs), along with detailed reasons for any divergence between the already reported household income and recently assessed household income after obtaining necessary information from the borrower(s), to ensure compliance with the level of indebtedness.
Computation of loan repayment obligations shall include taking into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralized 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.
Guidelines on pricing of microfinance loans (Factsheet)
REs are required to frame a board-approved policy on pricing of microfinance loans to cover the following aspects:
(i) A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
(ii) 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;
(iii) The range of spread of each component for a given category of borrowers; and
(iv) A ceiling on the interest rate and all other charges applicable to the microfinance loans.
REs are required to disclose pricing related information to a prospective borrower in a standardised and simplified factsheet, as illustrated in Annex II to the above Notification. All type of fee and and charges applicable for microfinance borrower, payable to RE and/ or its partner/ agent, are required to be clearly mentioned in the said factsheet, i.e. the borrower shall not be charged any amount which is not explicitly mentioned therein.
Further, there shall be no pre-payment penalty on microfinance loans. However, penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.
Guidelines on fair practices code (FPC) for Conduct towards Microfinance Borrowers
All REs are required to put in place a board approved ‘fair practices code (FPC)’ based on these directions, which shall be displayed in a language understood by the borrowers, in the offices and on the website.
Further, there shall be a standard form of loan agreement for microfinance loans in a language understood by the borrower. Each borrower shall be provided with a loan card which shall incorporate the following information:
(i) Information which adequately identifies the borrower;
(ii) Simplified factsheet on pricing;
(iii) All other terms and conditions attached to the loan;
(iv)Acknowledgements by the RE of all repayments including instalments received and the final discharge; and
(v) Details of the grievance redressal system, including the name and contact number of the nodal officer of the RE.
All details in the loan card should be in a language understood by the borrower. Also, issuance of non-credit products shall be with full consent of the borrowers with details of applicable fee structure in the loan card itself.
Guidelines related to Recovery of Microfinance Loans and Engagement of Recovery Agents
REs are required to devise a mechanism for identification of the borrowers facing repayment related difficulties, engagement with such borrowers and providing them necessary guidance about the recourse available.
Recovery shall be made at a designated/ central designated place decided mutually by the borrower and the RE. However, field staff shall be allowed to make recovery at the place of residence or work of the borrower if the borrower fails to appear at the designated/ central designated place on two or more successive occasions.
RE or its agent shall not engage in any harsh methods towards recovery. Without limiting the general application of the foregoing, following practices shall be deemed as harsh:
(i) Use of threatening or abusive language;
(ii) Persistently calling the borrower and/ or calling the borrower before 9:00 a.m. and after 6:00 p.m.;
(iii) Harassing relatives, friends, or co-workers of the borrower;
(iv)Publishing the name of borrowers;
(v) Use or threat of use of violence or other similar means to harm the borrower or borrower’s family/ assets/ reputation;
(vi)Misleading the borrower about the extent of the debt or the consequences of nonrepayment.
REs are required to have a dedicated mechanism for redressal of recovery related grievances. The details of this mechanism are required to be provided to the borrower at the time of loan disbursal.
Further, REs can engage the Recovery Agents after due diligence, which shall mean the agencies engaged by the RE for recovery of dues from its borrowers and the employees of these agencies. However, the RE shall provide the details of recovery agents to the borrower while initiating the process of recovery, to ensure due notice and appropriate authorization.
The Recovery Agent shall also carry a copy of the notice and the authorization letter from the RE along with the identity card issued to him by the RE or the agency, which shall also incorporate the contact details of the recovery agency and the RE.
RBI Notification dt. 14/03/2022: Master Directions/ Regulatory Framework 2022 for Microfinance Loans