The Reserve Bank of India (RBI) on Monday allowed microfinance institutions the freedom to set interest rates they charge borrowers, with a caveat that the rates should not be usurious.
In revised guidelines for microfinance loans, which will take effect April 01, 2022, 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 ₹3 lakh. Earlier, the upper limits were ₹1.2 lakh for rural borrowers and ₹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.
“The revision of the income cap to ₹3 lakh will expand the market opportunity and interest rate cap removal will promote risk-based underwriting, said Udaya Kumar Hebbar, MD and CEO at CreditAccess Grameen Ltd. “This reflects the confidence shown by the central bank in the ability of MFIs to responsibly cater to the bottom of the pyramid,” he said.
“Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank,” the RBI said in its master direction.
Earlier, the cap on the Interest rate was the lower of: average cost of borrowing multiplied by 2.75; or cost of funds plus 10%, according to microfinance industry executives.
Each RE shall disclose pricing-related information to a prospective borrower in a standardised, simplified factsheet, the RBI said.
“Any fees to be charged to the microfinance borrower by the RE and/ or its partner/ agent shall be explicitly disclosed in the factsheet. The borrower shall not be charged any amount which is not explicitly mentioned in the factsheet,” it added.
There shall be no pre-payment penalty on microfinance loans. Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount, the regulator said.
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, it said.
The RBI said each 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.
“The REs shall have a due diligence process in place for engagement of recovery agents, which shall, inter alia, cover individuals involved in the recovery process,” it said.
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.
As per the new norms the minimum requirement of microfinance loans for NBFC-MFIs stands revised to 75% of the total assets.
Alok Misra, CEO & Director, MFIN, the association of microfinance entities said, “Extremely comprehensive, the harmonised regulations will usher in a new era/beginning for the microfinance sector where a common regulatory framework will be applicable to all regulated entities of the RBI.”
“Besides creating a level playing field, the framework will address issues of over indebtedness and multiple lending which were of paramount concerns for the sector. More importantly, the RBI has taken a prudent view of the bottlenecks that presented in credit delivery, addressing each of them.”
He said the revision of household income was a progressive move with far-reaching implications as more needy, low-income households will now come into the purview of accessible credit, taking us closer to our financial inclusion goal.