Microfinance lenders can’t charge usurious interest: RBI

MUMBAI: Microfinance lenders cannot charge usurious rate of interest from borrowers, the Reserve Bank of India (RBI) said on Monday. It also asked them to put 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 ₹3 lakh.

Issuing the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, RBI said all regulated entities 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 such loans.

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

Also, each regulated entity 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 regulated entity or its partner or agent shall be explicitly disclosed in the factsheet. The borrower shall not be charged any amount that is not explicitly mentioned in the factsheet,” according to the central bank.

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

The central bank said each regulated entity 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 maximum of 50% 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 borrowers, according to the central bank.

Under the earlier guidelines, a non-banking financial company (NBFC) that does not qualify as an NBFC-Microfinance Institution (NBFC-MFI), cannot extend microfinance loans exceeding 10% of its total assets, according to the regulations laid down by the central bank. The maximum limit on microfinance loans for such NBFCs now stands revised at 25% of total assets.

PEOPLE SHALL NOT BE CHARGED ANY AMOUNT NOT EXPLICITLY STATED IN THE FACTSHEET, ACCORDING TO RBI