RBI lifts interest cap on microfinance institutions, bans usurious rates

Borrower cannot be charged any amount not been explicitly mentioned in a factsheet, says regulator.

The Reserve Bank of India (RBI) on Monday released its final guidelines for microfinance loans, lifting an interest cap and allowing companies to have a board-approved policy to price for such lending.

The RBI will continue checking that microfinance institutions do not charge usurious rates. The regulator said each entity has to disclose pricing related information to borrowers in a standardised simplified factsheet. A borrower cannot be charged any amount that has not been explicitly mentioned in the factsheet.

Also, it has revised the definition of microfinance loans as a collateral-free loan given to a household having annual household income up to Rs 300,000. Currently, a microfinance borrower is identified by annual household income not exceeding Rs 125,000 for rural and Rs 200,000 for urban and semi-urban areas.

“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 Rs 3,00,000, shall be considered as microfinance loans,” said the RBI.

Regulated entities should have board approved policy which ensures that the outflows of a household on account of repayment of monthly loan obligations should not exceed 50 per cent of the income of the household. “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”, the RBI said.

And, for assessing the household income, the regulated entities have to put in place a board-approved policy. The RBI has also said that self-regulatory organisations (SROs) and other associations/ agencies may also develop a common framework based on the indicative methodology. The regulated entities may adopt/ modify this framework suitably as per their requirements with approval of their boards. And, each regulated entity shall mandatorily submit information regarding household income to the Credit Information Companies (CICs).