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Regulatory Framework for Microfinance Loans

Q 11. Is there any specific reason for including a dedicated mechanism for redressal of recovery related grievances when there is already a customer grievance redress mechanism? +

Ans. The purpose of having a dedicated redress mechanism for recovery related grievances is that these grievances should be promptly addressed. Treating (clubbing) them as (with) other complaints (e.g., operational issues) may result in delayed action. However, this does not imply that a separate redress mechanism for recovery related grievances is being mandated. REs can restructure/ re-organise the existing customer grievance redress mechanism to identify and promptly address recovery related grievances.

Q 12. What is the purpose of assessment of household expenses as provided under Annex-I on ‘Indicative Methodology for Household Income Assessment’? Does it mean that household income for computing the limit on loan repayment obligations of a household is the household income net of expenses? +

Ans. Annex I provides only an indicative methodology for assessment of household income, and REs are required to put in place a board-approved policy for household income assessment. References to household expenses and assessment of household profile are only for the purpose of validation of the household income reported by the borrowers.

Q 13. Is the regulatory framework for microfinance loans applicable to all entities operating in the microfinance sector including trusts and societies? +

Ans. The regulatory framework for microfinance loans is applicable only to REs/ entities as defined under para 2.1⁴ and para 9.2⁵ of the directions. However, it may be prudent for other lenders operating in the microfinance sector to follow these customer-centric directions.

Q 13A. Is the exemption for ‘Not for Profit’ companies engaged in Microfinance Activities under para 9 of the directions, applicable to other ‘Not for Profit’ companies undertaking NBFI activities as well?

Ans. The exemption provided by the Reserve Bank to ‘Not for Profit’ companies (i.e., companies incorporated under Section 8 of the Companies Act, 2013 or Section 25 of the Companies Act, 1956) is applicable to those which are providing microfinance loans as defined in the directions and subject to conditions specified in para 2(i) of our ‘Master Direction – Exemptions from the provisions of RBI Act, 1934’ dated August 25, 2016 (as amended from time to time). This exemption is not applicable to other ‘Not for Profit’ companies engaged in NBFI business and it is incumbent upon such companies to obtain a certificate of registration under Section 45-IA of the Reserve Bank of India Act, 1934 in case these companies are fulfilling the ‘Principal Business Criteria’ as specified in our Press Release 1998-99/1269 dated April 08, 1999.

Q 14. What should a customer keep in mind while availing a microfinance loan? +

Ans. The customer should keep in mind, among others, the following:

a) There is no requirement of keeping any deposit/ margin/ collateral/ primary security with the lender at any stage of the microfinance loan.

b) Lender is required to provide a loan card to the borrower in a language understood by the borrower which should have following information:

Information which adequately identifies the borrower;
Simplified factsheet on pricing;
All other terms and conditions attached to the loan;
Acknowledgements by the lender of all repayments including instalments received and the final discharge; and
Details of the grievance redress system, including the name and contact number of the nodal officer of the lender.

c) Purchase of any non-credit products is purely voluntary. Fee structure for such products shall be explicitly communicated in the loan card.

d) Training provided by the lenders is free of cost.

Q 15. What are the charges that a customer is required to pay for a microfinance loan? +

Ans. A customer is required to pay only those charges which are explicitly mentioned in the factsheet provided by the lender. Besides this, the customer should also note the following:

There is no pre-payment penalty on microfinance loans.
Penalty, if any, for delayed payment can be applied only 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 in writing well in advance and these changes shall be effective only prospectively.

Q 16. How can a borrower find about the current interest rates being charged on the microfinance loans? +

Ans. RBI has made it mandatory for lenders to display the minimum, maximum and average interest rates charged on microfinance loans in all their offices, in the literature (information booklets/ pamphlets) issued by them and details on their website.

¹ 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.

² in their offices, on their websites as part of Fair Practices Code and in the loan card issued to the borrower

³ 7.1.1 A 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.

⁴ 2.1 The provisions of these directions shall apply to the following entities:

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).

⁵ Exemptions from Sections 45-IA3, 45-IB4 and 45-IC5 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.