Microfinance lenders cannot charge usurious interest rates: RBI

Microfinance lenders cannot charge usurious interest rates to borrowers, the Reserve Bank said on Monday, and also asked them to put a cap on loan pricing and related fees.

A microfinance loan is defined as an unsecured loan given to a household with an annual income of up to Rs 3 lakh.

In issuing the ‘Master Direction Reserve Bank of India (Regulatory Framework for Microfinance Loans), 2022’ guidelines, RBI said that all Regulated Entities (REs) should put in place a board-approved policy regarding pricing microfinance loans, covering a cap on interest rates and all other charges applicable to microfinance loans.

“Interest rates and other fees/commissions on microfinance loans should not be usurious. They should be subject to supervisory control by the Reserve Bank,” the executive says.

In addition, each RE must disclose pricing information to a potential borrower in a standardized simplified information sheet.

“Any fees to be charged to the microfinance borrower by the RE and/or its partner/agent must be explicitly disclosed in the information sheet. The borrower will not be charged any amount that is not explicitly mentioned in the fact sheet,” he added.

Also, there should be no prepayment penalty on microfinance loans.

“The penalty, if any, for late payment will be applied against the overdue amount and not against the full loan amount,” the RBI said.

Regarding the limit of a household’s loan repayment obligations, he said each RE should have a board-approved policy regarding the limit of cash outflows due to the repayment of a household’s monthly loan obligations as a percentage monthly household income.

“This will be subject to a limit of no more than 50% of monthly household income,” he said.

There should also be a standard loan agreement form for microfinance loans in a language understood by the borrower.

Under previous guidelines, an NBFC that does not qualify as a Non-Banking Financial Company-Microfinance Institution (NBFC-MFI) cannot provide microfinance loans exceeding 10% of its total assets.

The maximum microfinance loan limit for these NBFCs (NBFCs other than NBFC-MFIs) is now revised to 25 percent of total assets.

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Stephen V. Lee