The RBI has published FAQs on the regulatory framework for microfinance loans

The RBI has published FAQs on the regulatory framework for microfinance loans

That Reserve Bank of India (RBI) has published Frequently Asked Questions on Regulatory Framework for Microfinance Loans.

Microfinance is a type of banking that provides financial services to low-income individuals or groups of people who would not otherwise have access to finance. Microfinance involves the extensive provision of training and support by microfinance institutions (MFIs). Typically, this is the cause of the high repayment rates.

Frequently asked questions about the regulatory framework for microfinance loans

Q 1. Certain aspects of the Master Direction on Regulatory Framework for Microfinance Loans may require additional time to develop new policies, obtain board-level approvals, make changes to technology systems, train employees, etc. Whether the timeline for the full rollout of these directions can be extended while maintaining the effective date of April 1, 2022?

to The effective date of these instructions is April 1, 2022. However, given the implementation difficulties expressed by some Regulated Entities (REs), REs are advised to fully implement these instructions at the earliest on a best effort basis, but no later than October 1, 2022.

Q 2. Are all members of a household required to become a microfinance loan borrower?

to The instructions require an assessment of household-level income and debt. It is not necessary to treat all members of the household as applicants/borrowers of a loan that can be granted to a single member. Board-approved policies of REs may include the methods/operational framework for assessing the income and debt of all household members.

Q 3. Would consumer loans (ie for purchase of appliances, expenses at ceremonies, etc.) without collateral be treated as microfinance loans?

to All unsecured loans to individuals belonging to low-income households, ie households with an annual income of up to ₹3,00,000, are treated as microfinance loans.

Q 4. If a loan is secured by pledging collateral (gold, equipment, appliances, underlying assets, etc.), is that loan considered unsecured and classified as a microfinance loan?

to Loans secured by the pledging of collateral are not treated as microfinance loans.

Q 5. Do the guidance on limiting a household’s monthly loan repayment obligation to 50 percent as a percentage of monthly household income apply to non-microfinance loans made to low-income households?

to Yes, for the provision of a non-microfinance loan to a low-income household (as defined under the Guidelines), it should be ensured that the 50 percent limit of a household’s monthly loan repayment obligations as a percentage of monthly household income is not breached. In other words, the 50 percent limit includes both microfinance and non-microfinance loans.

Q 6. How should credit facilities with no EMI feature be treated to determine the household’s total monthly repayment obligations?

to Board-approved policies of REs should cover such operational aspects. One possible way might be to spread the annualized repayment obligations over 12 months to estimate the household’s monthly expenditure on debt repayment.

Q 7. Can the expected income from an asset/activity funded by a microfinance loan be included in the estimate of household income?

to no

Q 8. What type of insurance charges should be disclosed in the factsheet and included in the calculation of the effective annualized interest rate? Should fees for non-credit products also be included in the fact sheet?

to The insurance fees included in the fact sheet only apply to credit-linked insurance products as these fees are linked to the microfinance loan. A borrower would not have incurred these costs if he had not taken out the loan. The fact sheet should contain information related only to microfinance loan pricing to keep it concise. Disclosures relating to other non-credit products should be provided separately from the fact sheet, as mentioned in paragraph 7.1.51 of the Instructions. All non-credit products (both financial products such as investment products, insurance products, etc., and non-financial products such as solar lanterns, sewing machines, etc.) should only be provided with the express consent of the borrower, and REs should ensure that there is no direct or indirect link between the loan made granted to the borrower and other non-credit products. No non-credit product may be sold as a prerequisite for the credit product. REs should clearly state2 that purchases of non-credit products by microfinance borrowers are purely voluntary. The RE’s Board-approved Code of Fair Practices, as mentioned in paragraph 7.1.13 of the Instructions, should also cover this aspect.

Q 9. Except in cases of restructured loans, may REs review and revise the interest rates applicable to existing loans during the life of the loan?

to The instructions apply to loans sanctioned on or after April 1, 2022. Accordingly, the pricing of existing loans from NBFC-MFIs that were sanctioned before April 1, 2022 must continue to comply with the guidelines in place as of March 31, 2022. As other REs were already free to pricing sanctioned loans, they may also use those for review and revise applicable interest rates on existing loans, subject to compliance with relevant policies.

Q 10. Is the practice of calling a borrower before 9:00 am and after 6:00 pm considered harsh practice only for collection of delinquent loans, or also for normal business operations?

to This clause only applies to the recovery of borrowers with delinquent loans. For other borrowers, REs can continue with the existing schedule/process for dealings such as group meetings, moving into regular accounts, etc. at the borrower’s discretion.

Q 11. Is there a specific reason to include a dedicated mechanism for resolving complaints related to recovery when a mechanism for resolving customer complaints already exists?

to The purpose of having a dedicated redress mechanism for complaints related to recovery is to ensure that those complaints are promptly addressed. If they are treated (skipped) like (with) other complaints (e.g. operational problems), this can lead to delays in action. However, this does not mean that a separate redress mechanism will be required for complaints related to recovery. REs may restructure/reorganize the existing customer complaint resolution mechanism to identify and promptly address complaints related to reclamation.

Q 12. What is the purpose of estimating household expenditure as provided in Appendix I on “Indicative methodology for household income estimation”? Does this mean that household income for the calculation of a household’s loan repayment obligation limit is household income minus expenses?

to Schedule I contains only an indicative method for assessing household income, and REs must adopt a board-approved household income assessment policy. References to household expenditures and household profile assessment are only for validation of household income reported by borrowers.

Q 13. Does the microfinance lending regulatory framework apply to all microfinance companies, including trusts and corporations?

to The regulatory framework for microfinance loans only applies to REs/entities as defined in Section 2.14 and Section 9.25 of the Guidelines. However, it may be advisable for other lenders active in the microfinance sector to follow these client-centric directions.

Q 14. What should a client consider when availing a microfinance loan?

to The customer should consider the following, among other things:

a) There is no obligation to deposit deposits/margins/collateral/initial collateral with the lender at any stage of the microfinance loan.

b) The lender shall provide the borrower with a credit card in a language the borrower understands, which should contain the following information:

• information that reasonably identifies the borrower;
• Simplified Pricing Factsheet;
• Any other conditions attached to the loan;
• Lender confirmations of all repayments including installments received and final discharge; and
• Details of the complaints system, including the name and contact number of the lender’s node officer.

c) The purchase of products without credit is purely voluntary. The fee structure for such products is expressly communicated in the rental card.

d) The training courses of the distributors are free of charge.

Q 15. What fees does a customer have to pay for a microfinance loan?

to A customer only has to pay the fees expressly listed in the information sheet provided by the lender. In addition, the customer should also note the following:

• There is no prepayment penalty for microfinance loans.
• Any late payment penalty can only be applied to the overdue amount and not to the entire loan amount.
• Any change in interest rate or other charges will be communicated to the borrower in writing in good time and such changes will only apply prospectively.

Q 16. How can a borrower find out about current interest rates on microfinance loans?

to RBI has required lenders to disclose the minimum, maximum and average interest rates for microfinance loans in all of their offices, in the literature they publish (information leaflets/booklets) and on their website.