As the microfinance sector has gained more and more importance, RBI has introduced comprehensive microfinance regulations which are effective from 1st April, 2022. This article takes an overview of the said Directions are identifies the most urgent action points.
Applicability
These regulations are comprehensive both because of the facets covered and also because the same is applicable for the commercial banks, co-operative banks, as well as NBFC-MFI and MBFC-HFC.
Definition of Micro-Finance Loan (MFIL)
MFIL was earlier defined using different criteria. The same is now streamlined to mean ‘a collateral-free loan given to a household (husband, wife, and unmarried children) having annual household income up to INR 3,00,000’.
The minimum number of MFIL for the MFIL giving entities is reduced to 75% of the total assets. The maximum number of MFILs by other than MFIL giving entities is also increased to 25% of their total assets (from 10% earlier).
The criteria for the end-use and mode of application or disbursal are now done away with.
Further, it is clarified that the MFIL is not to be linked with a lien on the deposit account of the borrower.
A higher number of Board-approved policies
The MFIL giving entities are being required to have a higher number of Board-approved policies which shall govern several different aspects. The important ones are as follows:
- Policy to provide the flexibility of repayment periodicity on MFIL as per borrowers’ requirement
- Assessment of household income
- The limit on the outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income
- Pricing of the MFIL with reference to the interest rate
- Fair Practice Code
- The conduct of employees and the system for their recruitment, training and monitoring
The limit on the % of repayment obligations
The limit on the outflows on account of repayment of monthly loan obligations of a household as a percentage of the monthly household income is subject to a limit of a maximum of 50% of the monthly household income. In simple words, the EMIs of the loan (including the proposed loan and all existing loans of all types) shall not exceed half of the total income of the household.
If the % exceeds the limits for the existing loans, the existing loans shall be allowed to mature and no additional loans shall be given in the interim.
Though this is likely to leave the households with more disposable income, their borrowing capacity is also likely to be reduced. However, this additional income may be used for the prepayment of the existing loans as well which is without any prepayment penalty.
Reporting to the Credit Information Companies (CICs)
The MFIL giving entities are required to report the following information to the CICs additionally:
- Information regarding household income
- Information regarding the % of repayment obligations
Partial removal of the Section 8 exemption
The Section 8 companies (not for profit entities) which were allowed to extend loans and financial assistance without obtaining required registrations as NBFCs are now facing different criteria. They shall require registration if the assets are increasing beyond INR 100 crores.
Regulation of and disclosure regarding the pricing of MFIL
In addition to having the Board approved policy for interest rates, there are many additional requirements regarding the interest rate. In addition to the anodyne warning of not charging usurious rates, there are the following requirements:
- Disclosing the pricing related information to a prospective borrower in a standardised simplified factsheet
- Charging only the disclosed amounts and fees
- No pre-payment penalty
- The penalty is only on the overdue amount and not the entire amount of the loan
- Only prospective changes in the interest rate
Conduct towards borrowers and recovery
- Board approved fair practices code to be displayed on the website of the MFIL giving entity and its offices.
- A standard form of the loan agreement is to be provided in a language understood by the borrower.
- Providing a loan card to the borrower in a language understood by the borrower.
- Recovery shall be made at a designated/ central designated place decided mutually by the borrower and the MFIL giving entity.
Given this significant change in the operational criteria, all MFIL giving entities are required to take a stock of their existing operations and make changes effectively.
– Team Efficax