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

ParametersPrevious definitionCurrent definition
Household income (individual family unit, i.e., husband, wife and their unmarried children)Upto Rs 2,00,000 in urban areasUpto Rs 3,00,000 in any area. Large players to benefit.
Client categoryLow income householdsLow income households
Nature of loansCollateral freeCollateral free, hence no lien on borrower deposit account
Distribution channelsNo clarityPhysical or digital delivery
Board approved policyRequiredRequired to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement.

4. Regulatory highlights

Policy pointsPreviousCurrentSector impact
Board approved policy requirementOnly FPC was specified.Household income assessment, Pricing, Staff training and FPC.Consensus should emerge. Promotes transparency and client protection.
Assessment of household incomeNot mandatory by RBIBoard-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 HouseholdNot 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 assetsMinimum 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 policyCapped. 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 methodologyCapped. (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, etcPricing transparency promotes client protection.
Prepayment penaltyNo prepayment penaltyNo prepayment penalty. Penalty allowed for overdue loans.Uniform consensus should emerge. Credit discipline should improve.
Supervisory scrutiny on interest rate chargedNSI ( 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 agentsNot allowedUndertaking regarding inappropriate behaviour by its employees or employees of the outsourced agency. Displayed on website, relevant documentsRBI keeps in mind client protection and defines coercive practices to be avoided. MFIs will hire these services.

Reference: RBI notification on 14th March, 2022.

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