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Regulatory Framework For Microfinance Loans: Highlights

Regulatory Framework For Microfinance Loans: Highlights

The Reserve Bank of India (RBI) allowed Microfinance Institutions(MFI) the freedom to set interest rates they charge borrowers, with a caveat that the rates should not be usurious.

  • The guidelines will take effect 1st April 02022.
  • Earlier in 2021, the RBI proposed to lift the interest rate cap on MFI.

Highlights of the Guidelines:

  • The RBI revised the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh.
  • Earlier, the upper limits were Rs.1.2 lakh for rural borrowers and Rs.2 lakh for urban borrowers.
  • As per the revised norms, Regulated Entities (REs) should put in place a board-approved policy regarding pricing of microfinance loans, a ceiling on interest rate and all other charges applicable to microfinance loans.
  • Each RE shall disclose pricing-related information to a prospective borrower in a standardised, simplified factsheet.
  • There shall be no prepayment penalty on microfinance loans.
  • Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.
  • 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.
  • Recovery of Loans: RE would have to put in place a mechanism for identification of the borrowers facing repayment-related difficulties, engagement with such borrowers and providing them necessary guidance about the recourse available.
  • To ensure due notice and appropriate authorisation, the RE will provide the details of recovery agents to the borrower while initiating the process of recovery.