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RBI Drops Pricing Curbs on Microfinance Loans, Says Lender Can't Charge High Interest Rate

By: Business Desk

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Last Updated: March 14, 2022, 19:03 IST

After the RBI's revision, microfinance loan will be defined as a collateral-free loan given to a household having annual household income up to Rs 3,00,000.

After the RBI's revision, microfinance loan will be defined as a collateral-free loan given to a household having annual household income up to Rs 3,00,000.

The new guidelines will come into effect from April 1, the central bank said.

The Reserve Bank of India on Monday, March 14, announced that it will be removing pricing caps on microfinance loans provided by any financial institutions. The central bank also said in a notification that these lender cannot charge usurious rate of interest from the borrower.

After the RBI’s revision, microfinance loan will be defined as a collateral-free loan given to a household having annual household income up to Rs 3,00,000. At the moment, a microfinance loan is defined as the collateral-free loan given to a borrower whose household income does not exceed Rs 1,25,000 for rural areas, and Rs 2,00,000 for semi-urban and urban areas.

“All collateral-free loans, irrespective of end use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to low-income households, i.e., households having annual income up to Rs 3,00,000, shall be considered as microfinance loans,” the central bank said issuing the ‘Master Direction Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022′.

“The definition of microfinance loans for ‘not for profit’ companies (registered under Section 8 of the Companies Act, 2013) is now aligned with the revised definition of microfinance loans viz., collateral-free loans to households with annual household income up to Rs 3,00,000, provided the monthly loan obligations of a household does not exceed 50 per cent of the monthly household income," the bank further said.

“Interest rates and other charges/ fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank," the central bank also said. Each RE (regulated entity) shall disclose pricing related information to a prospective borrower in a standardised simplified factsheet, it said.

“The computation of loan repayment obligations shall take into account all outstanding loans (collateral-free microfinance loans as well as any other type of collateralized loans) of the household. The outflows capped at 50 per cent of the monthly household income shall include repayments (including both principal as well as interest component) towards all existing loans as well as the loan under consideration," the notice also read.

The new guidelines will come into effect from April 1, the central bank said.

The RBI also suggested the REs to have a board-approved policy to provide the flexibility of repayment periodicity on microfinance loans as per borrowers’ requirement.

“Each RE shall mandatorily submit information regarding household income to the Credit Information Companies (CICs). Reasons for any divergence between the already reported household income and assessed household income shall be specifically ascertained from the borrower/s before updating the assessed household income with CICs," it added.

Further, existing loans, for which outflows on account of repayment of monthly loan obligations of a household will a percentage of the monthly household income exceed the limit of 50 per cent, shall be allowed to mature. However, in such cases, no new loans would be provided to these households till the prescribed limit of 50 per cent is complied with.

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first published:March 14, 2022, 18:55 IST
last updated:March 14, 2022, 19:03 IST
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