The Reserve Bank of India has instructed regulated entities (REs) lending to the microfinance sector to ensure that loans are collateral-free and not secured by a lien on the borrower’s deposit account, that repayment obligations are capped, that interest rates are not usurious, and that there is no prepayment penalty. The central bank’s harmonised regulatory framework for regulated lenders, which includes scheduled commercial banks, small financing banks, NBFC-MFIs, and NBFC-Investment and Credit Companies, includes these clauses.
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KEY POINTS:
● The central bank has eliminated the margin caps that were only applicable to non-banking finance companies—microfinance institutions—as a result of the regulatory framework’s harmonisation (NBFC-MFIs).
● The Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, will take effect on April 1, 2022, according to the central bank.
● All collateral-free loans offered to low-income households — households with annual income up to $3 lakh — will be termed microfinance loans, according to the RBI, regardless of end use or mode of application, processing, or disbursal (either through physical or digital channels).
● According to the Directions, REs must have a board-approved policy that allows them to provide flexibility in payback periodicity on microfinance loans based on the needs of the borrowers.
Price of a loan:
● NBFC-MFIs are no longer subject to the margin caps (not exceeding 10% for large MFIs with loan portfolios above Rs 100 crore and 12% for the rest).
● Each RE must implement a board-approved policy on microfinance loan pricing, which includes a well-documented interest rate model/approach for calculating the all-inclusive interest rate and demarcation of interest rate components such as cost of funds, risk premium, and margin, among others.
● “On microfinance loans, interest rates and other charges/fees should not be usurious. The Reserve Bank should conduct a supervisory examination of them.
● According to the instructions, “each RE shall give pricing relevant information to a prospective borrower in a standardised simple factsheet.”
● The minimum, maximum, and average interest rates levied on microfinance loans must be conspicuously displayed in all RE offices, in all literature (information booklets/ brochures) provided by it, and in all details on microfinance loans on the website.
The RBI emphasised that any change in interest rate or other charge must be communicated to the borrower in advance, and that these changes will only take effect in the future.
LIMITATIONS OF LOAN REPAYMENT:
● The rules set a limit on a household’s loan repayment responsibilities. Repayments (including both principal and interest component) on all existing loans as well as loans under consideration are included in the outflows, which are capped at 50% of monthly household income.
● Existing loans that have outflows in excess of 50% of a household’s monthly income due to repayment of monthly loan obligations will be permitted to mature.
In such instances, however, no further loans shall be issued to these households until the prescribed maximum of 50% is met.
Card of credit:
● Each RE must give the borrower a loan card that includes information that appropriately identifies the borrower, a simplified factsheet on pricing, and all other loan terms and conditions.
● The card should also include the RE’s recognition of all repayments, including instalments received and the final discharge, as well as information about the RE’s grievance redress mechanism, including the name and phone number of the RE’s nodal person.
● Non-credit products may only be issued with the borrowers’ complete assent, and the fee structure for such goods must be clearly explained to the borrowers in the loan card itself.
Outsourced Activities:
● The central bank stated that outsourcing any activity by the RE does not relieve the RE of its obligations, and that the RE has complete responsibility for following these instructions.
● The loan agreement, as well as the fair practises code (FPC) displayed in its office/branch premises/website, must state that the RE will be held liable for unethical behaviour by its personnel or workers of the outsourced agency and will give speedy grievance resolution.
Recovering a loan:
● According to the RBI, recuperation will take place at a recognized/centrally designated location. The borrower and the RE agree on a meeting location.
● If the borrower fails to arrive at the designated/ the designated place on two or more consecutive occasions, field employees will be entitled to recover at the borrower’s place of residence or work.
● The central bank emphasised that RE or its agent will not use any punitive recovery tactics.
● While initiating the recovery process, the RE shall give the borrower the names and contact information for recovery agents in order to ensure proper notification and authorization.
A copy of the notice and the RE’s authorization letter, as well as the RE’s or the agency’s identity card, must be carried by the agent.
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