RBI Micro Finance Framework

RBI Micro Finance Framework

Subject: Economy

Section: Monetary Policy

RBI (Regulatory Framework for Microfinance Loans) Directions, 2022– framework for regulated lenders, including scheduled commercial banks, small finance banks, NBFC-MFIs and NBFC-Investment and Credit Companies. The guidelines will take effect 1st April 2022.

• All collateral-free loans, provided to low income households (with annual income up to ₹3 lakh) shall be considered microfinance loans. Earlier, the upper limits were Rs.1.2 lakh for rural borrowers and Rs.2 lakh for urban borrowers.
• Lending to the microfinance segment shall be collateral free and not linked to the borrowers deposit account
• Interest rates and other charges/fees on these loans should be subject to supervisory scrutiny by the RBI
• Any change in interest rate or any other charge shall be informed to the borrower well in advance and applied prospectively.
• The RE or its agent shall not engage in any harsh methods towards loan recovery
• Regulated Entities (REs) should put in place a board-approved policy regarding pricing of microfinance loans, flexibility in repayment, a ceiling on interest rate and all other charges applicable to microfinance loans.
• The margin cap (not exceeding 10 per cent for large MFIs with loan portfolios exceeding ₹100 crore and 12 per cent for the others) is no longer applicable to NBFC-MFIs.
• Repayment cap-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 as well as under-consideration loans.
• There shall be no prepayment penalty on microfinance loans. Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.
• RE would have to 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.
• Each RE has to provide a loan card to the borrower incorporating information related to the borrower and pricing of the loan.
• Non credit products shall be provided with the consent of the borrower along with complete information on pricing.

About micro- finance framework

Microfinance is a form of financial service which provides small loans and other financial services to poor and low-income households by various microfinance institutions.

Microfinance Institution-MFI is an organisation that offers financial services to low income populations. These services include microloans, micro savings and micro Insurance. In most cases the so-called interest rates are lower than those charged by normal banks

Different types of financial services providers for poor people have emerged – Non-Government Organisations (NGOs), cooperatives, community-based development institutions like self-help groups and credit unions, commercial and state banks, insurance and credit card companies, telecommunications and wire services, post offices, and other points of sale – offering new possibilities.

Microfinance models:

• The Grameen Model: The Grameen model has been a case of exceptional success in Bangladesh. It turns out that many organizations in India have adopted the Grameen Bank model with little variations. Some of the notable examples are SHARE Microfinance Limited, Activists for Social Alternatives (ASA) and CASHPOR Financial and Technical Services Limited.
• Self Help Groups (SHGs): An SHG is a group of five to 20 people from the same income category formed on principle of lending their own savings.  This model was popularized by NABARD’s SHG-Bank linkage programme.
• Federated Self Help Groups (SHG federations):The Federation of SHGs brings together several SHGs. Compared to a single SHG; the federation of SHGs has more than 1000 members. Examples of Federated Self Help Group models in India are PRADAN, Chaitanya, SEWA and Dan Foundation.
• Cooperative banks
• Rotating Savings and Credit Associations (ROSCAS). E.g.: Chit funds
• Scheduled commercial banks (SCBs) (including small finance banks (SFBs) and regional rural banks (RRBs))
• Non-banking financial companies (NBFCs)
• Microfinance institutions (MFIs) registered as NBFCs

The difference between an NBFC-MFI and other NBFC is that while other NBFCs can operate at a very high level, MFIs cater to only the smaller level of social strata, with need of smaller amounts as loans.