Regulatory Framework for Microfinance Loans
The Reserve Bank of India (RBI) has issued a Master Direction outlining the regulatory framework for microfinance loans. The framework aims to ensure that microfinance institutions operate in a responsible and customer-centric manner.
Applicability: The directions apply to all Non-Banking Financial Companies-Micro Finance Institutions (NBFC-MFIs), Non-Banking Financial Companies (NBFCs), and banks that provide microfinance loans.
Definition of Microfinance Loan: A microfinance loan is defined as a loan with a ticket size of up to ₹1.25 lakh, with a tenure of at least 24 months, and used for income-generating activities.
Assessment of Household Income: Lenders must assess the household income of borrowers to ensure that the loan repayment obligation does not exceed 50% of the household income.
Limit on Loan Repayment Obligations: The total loan repayment obligation of a household should not exceed 50% of the household income.
Pricing of Loans: The interest rate on microfinance loans should be reasonable and transparent. Lenders must disclose the annual percentage rate (APR) to borrowers.
Guidelines on Conduct: Lenders must adhere to guidelines on conduct towards microfinance borrowers, including training of staff, responsibilities for outsourced activities, and guidelines related to recovery of loans.
Qualifying Assets Criteria: Lenders must ensure that at least 75% of their microfinance portfolio qualifies as “qualifying assets” as defined in the directions.
The Master Direction aims to promote responsible lending practices, protect the interests of microfinance borrowers, and ensure that microfinance institutions operate in a sustainable manner.
Chat with the Master Direction: