RBI Removes Pricing Caps For Microfinance Lenders

The Reserve Bank of India has removed caps on pricing of microfinance loans, altering the definition of what qualifies as microloans.

By doing so, the regulator has unwound strictures put in place after the Andhra Pradesh microloan crisis of 2010, and levelled the playing field between banks and non-bank microfinance lenders.

According to the Master Directions issued on Monday, all microfinance lenders must set up a board-approved policy for pricing of loans, the regulator said in its circular.

This policy must contain the following:

• A well-documented interest rate model or approach for arriving at the all-inclusive interest rate.

• A description of all the components of the interest rate, such as cost of funds, risk premium and margin, etc.

• The range of spread of each component for a given category of borrowers.

• A ceiling on the interest rate and all other charges applicable to the microfinance loans.

The new norms require that the interest rates and other charges must not be usurious in nature. As such, these charges are subject to RBI supervision, the regulator said.

Lenders must also describe the details of the interest rate and other charges levied to borrowers through a simple fact sheet. Charges not detailed in the fact sheet must not be levied on the customers, the RBI said.

Previous guidelines required a microfinance lender to adhere to a margin cap of 10%, if they have assets of Rs 100 crore and above. Other microfinance lenders were required to follow a margin cap of 12%.

The new interest rate guidelines are based on proposals in a consultation paper the regulator had released in June 2021. At the time, analysts had estimated that removal of the pricing cap would be a negative for banks who work in the microfinance sector.

Among the other changes approved by the RBI is a standard definition for microfinance loans.

All collateral-free loans extended by a lender to a borrower with an annual household income worth up to Rs 3 lakh will be included under the microfinance category. A household shall consist of husband, wife and their unmarried children, for the purposes of this definition. The loan shall also not be linked to a lien on deposits held by the borrower.

Lenders must also take into account the burden of repayment of the borrower. For this purpose, the monthly repayment for a borrower shall not exceed 50% of their monthly household income. The 50% repayment limit shall account for principal and interest payments of all loans, including the loan under consideration. This rule is expected to reduce instances of overlending to borrowers.

There shall be no pre-payment penalty on microfinance loans, the RBI said. Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount.

The lenders must ensure that field staff are adequately trained in collecting income and debt-related details of prospective borrowers. Outsourcing of activities does not absolve the lender of their responsibilities, the regulator said.

Lenders must 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.

Recoveries must be conducted at a predesignated place, agreed to by the lender and the borrower. The lenders are allowed to send field staff to the borrower's residence, if they fail to appear at the above mentioned place for two consecutive repayments.

Lenders and their agents must not engage in any harsh recovery measures against the borrowers, the regulator said. Micro-financiers must also not engage in:

• Using abusive language.

• Persistently calling borrowers before 9 a.m. or after 6 p.m.

• Harassment of coworkers, friends and family of the borrowers.

• Publishing names of borrowers.

• Misleading borrowers on extent of debt and consequences of non-repayment.

A lender, qualifying as a Non-Bank Finance Company-Micro Finance Institution can extend up to 25% of the loan book to borrowers outside the microfinance category, according to the new norms. Previously, this limit was set at 15%. Lenders not classified as NBFC-MFI can extend up to 25% of their loan book to microfinance borrowers, compared to the previous limit of 10%.