On March 14, 2022, the Reserve Bank of India (“RBI”) issued the primary guidance on the “Reserve Bank of India Guidelines (Regulatory Framework for Microfinance Lending), 2022” (“Guidelines”).
The provisions of these Instructions apply to the following entities:
(i) All commercial banks (including small financial banks, local banks and regional rural banks) excluding payment banks. (ii) All primary (urban) cooperative banks/state cooperative banks/central district cooperative banks. (iii) All non-bank financial companies (including microfinance institutions and housing finance companies.
The above entities are hereinafter referred to as “regulated entities (RE)” for the purposes of these instructions.
Definition of Microfinance Loan
A microfinance loan is defined as an unsecured loan given to a household whose annual income does not exceed INR 300,000. For this purpose, household means an individual family unit, i.e. husband, wife and their unmarried children.
All unsecured loans, regardless of end-use and mode of application/processing/disbursement (either through physical or digital channels), provided to low-income households, i.e. households with an income annual up to INR 300,000, should be considered as microfinance. loans. To ensure the unsecured nature of the microfinance loan, the loan should not be tied to a lien on the borrower’s deposit account. REs should have a policy approved by the board of directors to provide flexibility in the repayment frequency of microfinance loans according to borrower requirements.
The Instructions will enter into force on April 1, 2022, subject to the following provisions:
- Existing loans, for which outflows in repayment of a household’s monthly loan obligations as a percentage of monthly household income exceed the 50% limit, must be able to mature. However, in such cases, no new loans will be issued to these households until the prescribed limit of 50% has been met.
- “Not-for-profit” businesses that do not qualify for the exemptions mentioned in these instructions are required to register as NBFCMFIs and comply with the regulations applicable to NBFC-MFIs. Such companies must submit the application for registration as NBFCMFI to the Reserve Bank within three months of the publication of this circular. Firms that do not currently comply with the prescribed regulations for IMF-NBFCs must submit a board-approved plan, with a roadmap for meeting the prescribed regulations, with their application for registration.