1. Introduction
The directions shall be effective from April 01, 2022. Banks and all NBFCs now fall in the same regulatory framework. This was not the case earlier. Competition is set to increase. Going forward, service quality will be a focus area in-order to retain clients. NOF is also set to increase to Rs 7 Cr after March 31st, 2025.
2. Applicable to whom?
– All Commercial Banks (including Small Finance Banks, Local Area Banks, and Regional Rural Banks) excluding Payments Banks;
– All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks; and
– All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies)
3. Microfinance loan definition changes
| Parameters | Previous definition | Current definition |
| Household income (individual family unit, i.e., husband, wife and their unmarried children) | Upto Rs 2,00,000 in urban areas | Upto Rs 3,00,000 in any area. Large players to benefit. |
| Client category | Low income households | Low income households |
| Nature of loans | Collateral free | Collateral free, hence no lien on borrower deposit account |
| Distribution channels | No clarity | Physical or digital delivery |
| Board approved policy | Required | Required to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement. |
4. Regulatory highlights
| Policy points | Previous | Current | Sector impact |
| Board approved policy requirement | Only FPC was specified. | Household income assessment, Pricing, Staff training and FPC. | Consensus should emerge. Promotes transparency and client protection. |
| Assessment of household income | Not mandatory by RBI | Board-approved policy for assessment of household income & expense (each member) over 1 yr period. To be reported to CIC. Total EMI not to increase 50% of total household income. Inclusions – primary, secondary income source, type of accommodation, amenities, assets, expenses. | Client income database strengthened. Better visibility on repayment capacity of clients. |
| Limit on Loan Repayment Obligations of a Household | Not mandatory by RBI. Limit of total client indebtedness capped at Rs 1.25 Lakh. First cycle loans capped at Rs 75,000. | Total household EMI outflow not to increase 50% of total household income. Limit of total client indebtedness capped at Rs 1.25 Lakh. First cycle loans capped at Rs 75,000. | Reduction in client indebtedness. Focus on retaining clients increases. |
| Qualifying assets | Minimum 85% of net assets as Microfinance loans. | Minimum 75% of net assets as Microfinance loans. | Banks and large NBFCs in MF operations get more space to disburse more loans to MF clients. |
| Pricing policy | Capped. RBI released average base rates every Qrt. | No capping. However, not to be usurious. Factsheet transparently shared with charges breakup. Board approved pricing policy. | Increased competition. Better service quality expectations. Pricing transparency promotes client protection. |
| Pricing methodology | Capped. (Avg base rate of largest banks interest rates*2.75)+ 12% margin or cost of funds, whichever is lower. | Breakup of cost of funds, risk premium, margin, etc | Pricing transparency promotes client protection. |
| Prepayment penalty | No prepayment penalty | No prepayment penalty. Penalty allowed for overdue loans. | Uniform consensus should emerge. Credit discipline should improve. |
| Supervisory scrutiny on interest rate charged | NSI ( Non systematically important ) not required to report. | Minimum, maximum and average interest rates charged on microfinance loans displayed in offices, in the literature (information booklets/ pamphlets), on website. Interest rate calculation included in RBI returns. | Pricing transparency promotes client protection. |
| Outsourced recovery agents | Not allowed | Undertaking regarding inappropriate behaviour by its employees or employees of the outsourced agency. Displayed on website, relevant documents | RBI keeps in mind client protection and defines coercive practices to be avoided. MFIs will hire these services. |
Reference: RBI notification on 14th March, 2022.