The Reserve Bank of India (RBI) on Monday issued new directions for microfinance lending and said that all entities, banks, non-banking financial companies (NBFCs), and microfinance institutions (MFIs) are subject to the same regulations.

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In a release, the RBI said a microfinance loan is defined by the RBI as a 'collateral-free' loan granted to a household with an annual household income of up to Rs 3 lakh.

Previously, the urban household income limit was Rs 2 lakh, while the rural household income limit was Rs 1.6 lakh. According to the new rule, all collateral-free loans offered to low-income households, regardless of the end-use and mode of application/processing/disbursal, are considered microfinance loans.

The RBI has said the financial entities should have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirements. They should also have a board-approved policy for the assessment of household income.

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The previously put cap on the number of entities lending to one borrower has also been removed. The rule that said monthly loan repayment outflows cannot exceed 50 percent of the monthly household income, however, has been retained.

Now, 75 percent of NBFC-MFI entities must qualify as microfinance institutions (MFI) loans against the 85 percent earlier.

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All banks, NBFCs must provide reasons for the income discrepancy of borrowers, if any. All regulated entities must submit information on the household income of borrowers. The RBI has also said there shall 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.

The RBI said the new norms will come into effect from April 1, 2022.

First Published:Mar 14, 2022 1:49 PM IST