RBI seeks cap on interest rates on microfinance loans

Mumbai: Microfinance lenders cannot charge usurious rate of interest from borrowers, the Reserve Bank of India (RBI) said on Monday, and also asked them to put in place a ceiling on pricing of loans and related fees. A microfinance loan is defined as a collateral-free loan given to a household having an annual income of up to Rs3 lakh. Issuing 'Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022', RBI said all regulated entities (REs) should put in place a board-approved policy regarding pricing of microfinance loans, covering, a ceiling on the interest rate and all other charges applicable to microfinance loans.

"Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank," the framework said.

Also, each RE has to disclose pricing-related information to a prospective borrower in a standardised simplified factsheet.

"Any fees to be charged to the microfinance borrower by the RE and/ or its partner/agent shall be explicitly disclosed in the factsheet. The borrower shall not be charged any amount which is not explicitly mentioned in the factsheet," it added.

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

Regarding limit on loan repayment obligations of a household, it said each RE should 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," it said. There should also be a standard form of loan agreement for microfinance loans in a language understood by the borrower. Under the earlier guidelines, an NBFC that does not qualify as a Non-banking Financial Company - Microfinance Institution (NBFC-MFI), cannot extend microfinance loans exceeding 10 per cent of its total assets.