The Reserve Bank of India has asked regulated entities (REs) lending to the microfinance segment to ensure that loans are collateral-free and not linked with a lien on the borrower’s deposit account, repayment obligations are capped, interest rates are not usurious, and there is no pre-payment penalty.

These clauses are part of the central bank’s harmonised regulatory framework for regulated lenders, including scheduled commercial banks, small finance banks, NBFC-MFIs and NBFC-Investment and Credit Companies.

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Following the harmonisation of the regulatory framework, the central bank has done away with the margin caps that were specifically applicable to non-banking finance company--microfinance institutions (NBFC-MFIs).

The central bank said the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, will be effective from April 1, 2022.

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RBI said all collateral-free loans, irrespective of end use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households -- households having annual income up to ₹3 lakh -- shall be considered microfinance loans.

REs shall have a board-approved policy to provide flexibility of repayment periodicity on microfinance loans in line with the borrowers’ requirement, per the Directions.

Loan pricing

The margin caps (not exceeding 10 per cent for large MFIs with loan portfolios exceeding Rs 100 crore and 12 per cent for the others) are no longer applicable to NBFC-MFIs.

Each RE has to put in place a board-approved policy regarding pricing of microfinance loans covering a well-documented interest rate model/ approach for arriving at the all-inclusive interest rate and delineation of the components of the interest rate such as cost of funds, risk premium and margin, among others.

“Interest rates and other charges/ fees on microfinance loans should not be usurious. These should be subject to supervisory scrutiny by the Reserve Bank.

“Each RE shall disclose pricing related information to a prospective borrower in a standardised simplified factsheet,” according to the directions.

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.

RBI emphasised that any change in interest rate or any other charge shall be informed to the borrower well in advance and these changes shall be effective only prospectively.

Cap on loan repayment

The guidelines prescribe a limit on loan repayment obligations of a 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 loans 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 exceeds the limit of 50 per cent, 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

Loan card

Each RE has to provide a loan card to the borrower incorporating information, which adequately identifies the borrower; simplified factsheet on pricing; and all other terms and conditions attached to the loan.

Further, the card should also include acknowledgement 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 the full consent of the borrowers and the fee structure for such products shall be explicitly communicated to the borrower in the loan card itself.

Outsourced activities

The central bank said outsourcing of any activity by the RE does not diminish its obligations and the onus of compliance with these directions shall rest solely with the RE.

A declaration that the RE shall be accountable for inappropriate behaviour by its employees or employees of the outsourced agency and shall provide timely grievance redressal, shall be made in the loan agreement and also in the fair practices code (FPC) displayed in its office/ branch premises/ website.

Loan recovery

RBI said recovery shall be made at a designated/ centrally 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.

The central bank emphasised that RE or its agent shall not engage in any harsh methods towards recovery.

To ensure due notice and appropriate authorisation, the RE shall provide the details of recovery agents to the borrower while initiating the process of recovery.

The agent shall also carry a copy of the notice and the authorisation letter from the RE, along with the identity card issued to him by the RE or the agency