Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (<span style="color: Red">Updated as on October 10, 2024</span>) - આરબીઆઈ - Reserve Bank of India
Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (Updated as on October 10, 2024)
updated-as-on:
- 2024-10-10
- 2022-07-25
- 2022-03-14
| RBI/DOR/2021-22/89 March 14, 2022 All Commercial Banks (including Small Finance Banks, Madam/ Dear Sir, Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 Please refer to paragraph 8 of the Statement on Developmental and Regulatory Policies announced as a part of the Bi-monthly Monetary Policy Statement for 2020-21 dated February 5, 2021, regarding review of the regulatory framework for microfinance. 2. A consultative document on regulation of microfinance loans was issued for public comments on June 14, 2021. Based on the feedback received, it has now been decided to put in place the directions for microfinance loans which are enclosed. 3. Frequently asked questions (FAQs) on these directions are available at following link: Reserve Bank of India - Frequently Asked Questions (rbi.org.in) Yours faithfully, (J.P. Sharma) DoR.FIN.REC.95/03.10.038/2021-22 March 14, 2022 Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 In exercise of the powers conferred by Section 21, Section 35A and Section 56 of the Banking Regulation Act, 1949; Chapter IIIB of the Reserve Bank of India Act, 1934; and Sections 30A and Section 32 of the National Housing Bank Act, 1987, the Reserve Bank, being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the directions hereinafter specified. 1. Short Title and Commencement 1.1 These directions shall be called the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022. 1.2 These directions shall be effective from April 01, 2022, subject to stipulations as at paragraphs 5.3 and 9.3. 2. Applicability 2.1 The provisions of these directions shall apply to the following entities:
2.2 The entities mentioned at points 2.1(i) to 2.1(iii) above are hereafter referred to as ‘Regulated Entities (REs)’ for the purpose of these directions. 3. Definition of Microfinance Loan 3.1 A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to ₹3,00,000. For this purpose, the household shall mean an individual family unit, i.e., husband, wife and their unmarried children. 3.2 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, i.e., households having annual income up to ₹3,00,000, shall be considered as microfinance loans. 3.3 To ensure collateral-free nature of the microfinance loan, the loan shall not be linked with a lien on the deposit account of the borrower. 3.4 The REs shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement. 4. Assessment of Household Income 4.1 Each RE shall put in place a board-approved policy for assessment of household income. An indicative methodology for assessment of household income is provided in Annex I. 4.2 Self-regulatory organisations (SROs) and other associations/ agencies may also develop a common framework based on the indicative methodology. The REs may adopt/ modify this framework suitably as per their requirements with approval of their boards. 4.3 Each RE shall mandatorily submit information regarding household income to the Credit Information Companies (CICs). Reasons for any divergence between the already reported household income and assessed household income shall be specifically ascertained from the borrower/s before updating the assessed household income with CICs. 5. Limit on Loan Repayment Obligations of a Household 5.1 Each RE shall have a board-approved policy regarding the limit on the outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income. This shall be subject to a limit of maximum 50 per cent of the monthly household income. 5.2 The computation of loan repayment obligations shall take into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralized loans) of the 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 the loan under consideration. 5.3 Existing loans, for which outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income exceed 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. 5.4 Each RE shall provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the level of indebtedness. Besides, the RE shall also ascertain the same from other sources such as declaration from the borrowers, their bank account statements and local enquiries. 6. Pricing of Loans 6.1 Each RE shall put in place a board-approved policy regarding pricing of microfinance loans which shall, inter alia, cover the following:
6.2 Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank. 6.3 Deleted1 6.4 Deleted1 6.5 Deleted1 6.6 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. 6.7 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. This information shall also be included in the supervisory returns and subjected to supervisory scrutiny. 6.8 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. 6.9 As part of their awareness campaigns, SROs/ other industry associations may publish the range of interest rates on microfinance loans charged by their members operating in a district. SROs/ other industry associations may also sensitize their members against charging of usurious interest rates. 6.10 RBI would also make available information regarding interest charged by REs on microfinance loans. 6A. Key Facts Statement (KFS)2 6A.1 Definitions for the purpose of this para: (a) Key Facts of a loan agreement between an RE/a group of REs and a borrower are legally significant and deterministic facts that satisfy basic information required to assist the borrower in taking an informed financial decision. (b) Key Facts Statement (KFS) is a statement of key facts of a loan agreement, in simple and easier to understand language, provided to the borrower in a standardised format. (c) Annual Percentage Rate (APR) is the annual cost of credit to the borrower which includes interest rate and all other charges associated with the credit facility. (d) Equated Periodic Instalment (EPI) is an equated or fixed amount of repayments, consisting of both the principal and interest components, to be paid by a borrower towards repayment of a loan at periodic intervals for a fixed number of such intervals; and which result in complete amortisation of the loan. EPIs at monthly intervals are called EMIs. Other words and expressions not defined above, but used in this para, shall have the same meaning as assigned to them under the Master Direction on Interest Rate on Advances (2016) as updated from time to time or any other relevant regulation issued by the Reserve Bank. 6A.2 REs shall provide a KFS to all prospective borrowers to help them take an informed view before executing the loan contract, as per the standardised format given in the Annex IA. The KFS shall be written in a language understood by such borrowers. Contents of KFS shall be explained to the borrower and an acknowledgement shall be obtained that he/she has understood the same. 6A.3 Further, the KFS shall be provided with a unique proposal number and shall have a validity period of at least three working days for loans having tenor of seven days or more, and a validity period of one working day for loans having tenor of less than seven days. Explanation: Validity period refers to the period available to the borrower, after being provided the KFS by the RE, to agree to the terms of the loan. The RE shall be bound by the terms of the loan indicated in the KFS, if agreed to by the borrower during the validity period. 6A.4 The KFS shall also include a computation sheet of annual percentage rate (APR), and the amortisation schedule of the loan over the loan tenor. APR will include all charges which are levied by the RE. Illustrative examples of calculation of APR and disclosure of repayment schedule for a hypothetical loan are given in Annex II and Annex III respectively. 6A.5 Charges recovered from the borrowers by the REs on behalf of third-party service providers on actual basis, such as insurance charges, legal charges etc., shall also form part of the APR and shall be disclosed separately. In all cases wherever the RE is involved in recovering such charges, the receipts and related documents shall be provided to the borrower for each payment, within a reasonable time. 6A.6 Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower. 6A.7 The KFS shall also be included as a summary box to be exhibited as part of the loan agreement. 7. Guidelines on Conduct towards Microfinance Borrowers 7.1 General 7.1.1 A fair practices code (FPC) based on these directions shall be put in place by all REs with the approval of their boards. The FPC shall be displayed by the RE in all its offices and on its website. The FPC should be issued in a language understood by the borrower. 7.1.2 There shall be a standard form of loan agreement for microfinance loans in a language understood by the borrower. 7.1.3 Each RE shall provide a loan card to the borrower which shall incorporate the following:
7.1.4 All entries in the loan card should be in a language understood by the borrower. 7.1.5 Issuance of non-credit products shall be with full consent of the borrowers and fee structure for such products shall be explicitly communicated to the borrower in the loan card itself. 7.2 Training of Staff 7.2.1 Each RE shall have a board-approved policy regarding the conduct of employees and system for their recruitment, training and monitoring. This policy shall, inter alia, lay down minimum qualifications for the staff and shall provide necessary training tools to deal with the customers. Training to employees shall include programs to inculcate appropriate behavior towards customers. Conduct of employees towards customers shall also be incorporated appropriately in their compensation matrix. 7.2.2 Field staff shall be trained to make necessary enquiries regarding the income and existing debt of the household. 7.2.3 Training, if any, offered to the borrowers shall be free of cost. 7.3 Responsibilities for Outsourced Activities 7.3.1 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. 7.3.2 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 FPC displayed in its office/ branch premises/ website. 7.4 Guidelines related to Recovery of Loans 7.4.1 Each RE shall 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. 7.4.2 Recovery shall be made at a designated/ central 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. 7.4.3 RE or its agent shall not engage in any harsh methods towards recovery. Without limiting the general application of the foregoing, following practices shall be deemed as harsh:
7.4.4 Each RE shall have a dedicated mechanism for redressal of recovery related grievances. The details of this mechanism shall be provided to the borrower at the time of loan disbursal. 7.5 Engagement of Recovery Agents 7.5.1 Recovery agents shall mean agencies engaged by the RE for recovery of dues from its borrowers and the employees of these agencies. 7.5.2 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. REs shall ensure that the recovery agents engaged by them carry out verification of the antecedents of their employees, which shall include police verification. REs shall also decide the periodicity at which re-verification of antecedents shall be resorted to. 7.5.3 To ensure due notice and appropriate authorization, 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 authorization letter from the RE along with the identity card issued to him by the RE or the agency. Further, where the recovery agency is changed by the RE during the recovery process, in addition to the RE notifying the borrower of the change, the new agent shall carry the notice and the authorization letter along with his identity card. 7.5.4 The notice and the authorization letter shall, among other details, also include the contact details of the recovery agency and the RE. 7.5.5 The up-to-date details of the recovery agencies engaged by the RE shall also be hosted on the RE’s website. 8. Qualifying Assets Criteria 8.1 Under the earlier qualifying assets criteria3, a Non-banking Financial Company -Microfinance Institution (NBFC-MFI) is required to have minimum 85 per cent of its net assets4 as ‘qualifying assets’. The definition of ‘qualifying assets’ of NBFC-MFIs is now being aligned with the definition of ‘microfinance loans’ given at paragraph 3 above. The minimum requirement of microfinance loans for NBFC-MFIs also stands revised to 75 per cent of the total assets. 8.2 Under the earlier guidelines, an NBFC that does not qualify as an NBFC-MFI, cannot extend microfinance loans exceeding 10 per cent of its total assets. The maximum limit on microfinance loans for such NBFCs (i.e., NBFCs other than NBFC-MFIs) now stands revised to 25 per cent of the total assets. 9. Exemption for ‘Not for Profit’ Companies engaged in Microfinance Activities 9.1 The definition of microfinance loans for ‘not for profit’ companies (registered under Section 8 of the Companies Act, 2013) is now aligned with the revised definition of microfinance loans viz., collateral-free loans to households with annual household income up to ₹3,00,000, provided the monthly loan obligations of a household does not exceed 50 per cent of the monthly household income. 9.2 Exemptions from Sections 45-IA5, 45-IB6 and 45-IC7 of the RBI Act, 1934 have been withdrawn for those ‘not for profit’ companies engaged in microfinance activities that have asset size of ₹100 crore and above. 9.3 ‘Not for profit’ companies that are not eligible for the exemptions mentioned at paragraph 9.2 above, are required to register as NBFC-MFIs and adhere to the regulations applicable to NBFC-MFIs. Such companies shall submit the application for registration as an NBFC-MFI to the Reserve Bank within three months of the issuance of this circular. Those companies that currently do not comply with the regulations prescribed for NBFC-MFIs, shall submit a board-approved plan, with a roadmap to meet the prescribed regulations, along with their application for registration. 10. Net Owned Fund (NOF) Requirement Existing NBFC-MFIs shall adhere to the NOF glidepath indicated under paragraph 3.1 (a) of the Circular dated October 22, 2021 on ‘Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs’ as given below:
Annex I Indicative Methodology for Household Income Assessment 1. For undertaking the income assessment of a low-income household, information related to following parameters may be captured by the lender: (i) Parameters to capture household profile a) Composition of the household
b) Type of accommodation (owned/ rented, etc.) c) Availability of basic amenities (electricity, water, toilet, sewage, LPG connection, etc.) d) Availability of other assets (land, livestock, vehicle, furniture, smartphone, electronic items, etc.) (ii) Parameters to capture household income a) Primary source of income
b) Other sources of income
c) The income assessment as above may be carried out for all earning members with respect to all sources (primary or secondary) of income. While assessing income of all members from all sources, it may be ensured that there is no double counting of income such as counting of salary income of one migrant member also as remittance income for the household. d) While the income computation may be done on a monthly basis, the income assessment for all members and sources may be carried out over a period of minimum one year to ascertain the stability of the household income. (iii) Parameters to capture household expenses
2. Self-reported income at 1(ii) above may be corroborated with the profile of household at 1(i) and household expenses at 1(iii). Further, household income may also be verified from other sources (bank account statements of the borrowers, group members, other references in the vicinity, etc.). Annex II Illustrative Factsheet on computation of APR for Microfinance Loans
Annex III Illustrative Repayment Schedule under Equated Periodic Instalment for the hypothetical loan illustrated in Annex II
1 Repealed vide circular DOR.STR.REC.13/13.03.00/2024-25 dated April 15, 2024 2 Inserted vide circular DOR.STR.REC.13/13.03.00/2024-25 dated April 15, 2024 3 In order to be classified as a ‘qualifying asset’, a loan is required to satisfy the following criteria: (i) Loan which is disbursed to a borrower with household annual income not exceeding ₹1,25,000 and ₹2,00,000 for rural and urban/semi-urban households, respectively; (ii) Loan amount does not exceed ₹75,000 in the first cycle and ₹1,25,000 in subsequent cycles; (iii) Total indebtedness of the borrower does not exceed ₹1,25,000 (excluding loan for education and medical expenses); (iv) Minimum tenure of 24 months for loan amount exceeding ₹30,000; (v) Collateral free loans without any prepayment penalty; (vi) Minimum 50 per cent of aggregate amount of loans for income generation activities; and (vii) Flexibility of repayment periodicity (weekly, fortnightly or monthly) at borrower’s choice. 4 Net assets have been defined as total assets other than cash, bank balances and money market instruments. 5 45-IA: Requirement of registration as an NBFC 6 45-IB: Maintenance of a certain percentage of outstanding deposits in approved securities by deposit taking NBFCs 7 45-IC: Transfer of 20 per cent of net profit to reserve fund 14 Where such charges cannot be determined prior to sanction, REs may indicate an upper ceiling 15 The difference in repayment amount calculated from the total of instalments given under the detailed repayment schedule i.e., ₹23,280 (=970*24) vis-à-vis the amount of ₹23,274 (₹20,000 (loan amount) + ₹3,274 (Interest charges) mentioned under (8) is due to rounding off the instalment amount of ₹969.73 to ₹970 under the detailed repayment schedule 16 Computed on net disbursed amount using IRR approach and reducing balance method |
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