Regulatory framework for (microfinance loans ) direction 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 issues the directions.
- These directions shall be called the Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022.
- These directions shall be effective from April 01, 2022.
 Applicability
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).
Definition of Microfinance Loan
- 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.
- 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.
- 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.
- The REs shall have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement.
 Assessment of Household Income
- Each RE shall put in place a board-approved policy for assessment of household income.
- 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.
- 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.
 Limit on Loan Repayment Obligations of a Household
- 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.
- 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.
- 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.
- 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.
Pricing of Loans
- Each RE shall put in place a board-approved policy regarding pricing of microfinance loans which shall, inter alia, cover the following:
- A well-documented interest rate model/ approach for arriving at the all-inclusive interest rate;
- Delineation of the components of the interest rate such as cost of funds, risk premium and margin, etc. in terms of the quantum of each component based on objective parameters;
- The range of spread of each component for a given category of borrowers; and
- A ceiling on the interest rate and all other charges applicable to the microfinance loans.
Guidelines on Conduct towards Microfinance Borrowers
General
- 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.
- There shall be a standard form of loan agreement for microfinance loans in a language understood by the borrower.
- Each RE shall provide a loan card to the borrower .
 Training of Staff
- Each RE shall have a board-approved policy regarding the conduct of employees and system for their recruitment, training and monitoring.
 Responsibilities for Outsourced Activities
- 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.
- 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.
Guidelines related to Recovery of Loans
- 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.
- 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.
- 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:
- Use of threatening or abusive language
- Persistently calling the borrower and/ or calling the borrower before 9:00 a.m. and after 6:00 p.m.
- Harassing relatives, friends, or co-workers of the borrower
- Publishing the name of borrowers
- Use or threat of use of violence or other similar means to harm the borrower or borrower’s family/ assets/ reputation
- Misleading the borrower about the extent of the debt or the consequences of non-repayment
Engagement of Recovery Agents
- Recovery agents shall mean agencies engaged by the RE for recovery of dues from its borrowers and the employees of these agencies.
- 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.
- 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.
- The notice and the authorization letter shall, among other details, also include the contact details of the recovery agency and the RE.
- The up-to-date details of the recovery agencies engaged by the RE shall also be hosted on the RE’s website.
Qualifying Assets Criteria
- Under the earlier qualifying assets criteria1, a Non-banking Financial Company -Microfinance Institution (NBFC-MFI) is required to have minimum 85 per cent of its net assets2as ‘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.
- 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.
Exemption for ‘Not for Profit’ Companies engaged in Microfinance Activities
- 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.
- Exemptions from Sections 45-IA3, 45-IB4and 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.
- 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.
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