RBI GUIDELINES

‘ABHYUDAY – EK NAYI PEHAL’ TRAINING PROGRAM

RBI Master Directions, 2022

OVERVIEW OF MICROFINANCE
Microfinance is a form of financial service which provides small loans and other financial services to
poor and low-income households. It is an economic tool designed to promote financial inclusion which
enables the poor and low-income households to come out of poverty, increase their income levels and
improve overall living standards. It can facilitate achievement of national policies that target poverty
reduction, women empowerment, assistance to vulnerable groups, and improvement in the standards
of living.

DEVELOPMENTS IN MICROFINANCE SECTOR

Microfinance activities gained prominence in the early 1990s and RBI recognized it as a new paradigm,
with immense potential and was very supportive for its growth. When the demands for regulating the
MFIs were made, Shri Jagdish Capoor, the then Deputy Governor, in 2001 stated that “As MFIs are
significantly different from commercial banks both in terms of institutional structure and product
portfolio, application of the same set of regulatory and prudential guidelines to MFIs, in our view, not only
runs the risk of distorting the emerging market but it may also reduce the efficiency of these institutions.”

When the demands gained momentum by

2005, the then Governor, Dr YV Reddy in
2005 stated that “Microfinance movement
across the country involving common
people has benefited immensely by its
informality and flexibility. Hence, their
organisation, structure and methods of
working should be simple, and any
regulation will be inconsistent with the
core-spirit of the movement”. Thus, RBI
had extended every possible support for a
financial innovation that was seen as
important for furthering financial inclusion
Prof. Muhammad Yunus, A Nobel Laureate and Father of Microfinance
in the country.

However, as the sector grew, certain inadequacies and failures became apparent culminating in the
Andhra Pradesh (AP) microfinance crisis in 2010. This crisis was attributed to the irrational exuberance of
some MFIs who, in their eagerness to grow business, had given a go by to the conventional wisdom and
good practices such as due diligence in lending and ethical recovery practices. Over-indebtedness of the
borrowers led to difficulties in repayments and forced recoveries by some of the MFIs finally led to public
uproar and subsequent intervention by the state government. In the wake of this crisis, RBI constituted a
Committee (Chairman: Shri Y H Malegam) to study issues and concerns in the MFI sector.

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 RESERVE BANK OF INDIA (RBI)
RBI is an institution of national importance and the pillar of the surging Indian economy. It is a member of
the International Monetary Fund (IMF).

• RBI regulates the credit and currency system in India.

• The chief objectives of the RBI are to sustain the confidence of the public in the system, protect
the interests of the depositors, and offer cost-effective banking services like cooperative banking
and commercial banking to the people.

RBI GUIDELINES
1. Household - The household shall mean an individual family unit, i.e., husband, wife and their
unmarried children.

Not a part of Grandfather

household

Mother Father

Unmarried Unmarried
Married son
Not a part of son daughter
household

Wife

The other members if the household will not count as the household, as per new RBI guidelines.

For example – The client Mrs. Rashmi lives with her mother-in-law, father-in-law, husband, her two
unmarried children and her sister-in-law. Only Mrs. Rashmi, her husband and her two unmarried children
will be counted in the Household Profile.

2. Household Income - A microfinance borrower is identified by annual household income up to RS.

3,00,000/-.

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 3. Assessment of Household Income
 Importance - Microfinance loans mostly provided to women borrowers who may not have a
significant income at individual level. And as they are low – income households’ individual
income might not be sufficient for existence and loan repayment.
 Factors considering for assessment of household income
→ Parameters to capture household profile
1. Composition of household
2. Type of household
3. Availability Basic amenities
4. Availability of other assets
→ Parameters to capture household income
1. Sector of work
2. Nature of work
3. Income frequency
4. Months/days of employment over last year
5. Self-report monthly income
6. Average monthly income

Other sources of income: rent, pension, scholarship etc.

a. All the primary and secondary income of all the family members should be taken into count.
(Income of migrant members should not be assessed. It will be a case of double counting or
error in counting).

b. The income assessment of all the members and sources may be carried out for a period of
one year to know the stability of income, but the income computation can be done on
monthly basis.
Primary source of income Other sources of
income

Sector of work (Agriculture & allied activities, trading, manufacturing, Remittance

services, etc.)

Nature of work (Self-employed or salaried, regular or seasonal, etc.) Rent/ Lease

Frequency of income (daily/ weekly/ monthly) Pension

Months/ days of employment over last one year Government

transfer

Self-reported monthly income Scholarship

Average monthly income (to be derived from (iv) & (v) above) Others (specify
details

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 4. Assessment of Household Expenditure
 Regular monthly expenses (food, utilities, transport, house/ shop rent, clothing, regular
medical costs, school/ college fees, etc.)
 Irregular monthly expenses (medical expenses, house renovation, purchase of household
goods, functions, etc.)

5. Loan Repayment -
 The repayment cannot be more than a limit of maximum 50% of the monthly household
income.
 The calculation of total loan repayment amount shall include all outstanding loans which can
be collateral-free loans and any other type of collateralized loans of the household which
should not be more than 50% of the household income.
6. In case, the Recovery staff is changed due to any reason, he must possess an authorization letter
and inform the client about the change.
7. Recovery –
 It must be done only at the mutually decided central place by the borrower client and the
entity. Only in the case of absence of borrower for two or more times, the field staff shall visit
borrower’s residence or place of work.
 At the time of recovery, the staff must carry the identity card issued to him by the Company
and a copy of notice and authorization letter.
8. A fair practise code must be displayed in all the branches, offices, and websites in the vernacular
language understood by the borrower.
9. A standard form of loan agreement in a language understood by the borrower.
10. A loan card must be provided to the borrower in vernacular language which must include the
following:
 Sufficient information that allows you to properly identify the borrower.
 Simplified factsheet on pricing.
 All the loan-related terms and conditions.
 Acknowledgment receipt of all repayments including instalments and repayments.
 Details of the grievance redressal system, including the name and contact number of the
nodal officer.
11. Interest Rate - A board-approved policy regarding pricing of microfinance loans which shall,
inter alia, cover the following:
 A well-documented interest rate model/ approach for arriving at the all-inclusive interest
rate.
 Delineation of the components of the interest rate such as cost of funds, risk premium and
margin, etc. in terms of the quantum of each component based on objective parameters.
12. Any change in interest rate or any other charge shall be informed to the borrower well in
advance and these changes shall be effective only prospectively.
13. There shall be no pre-payment penalty on microfinance loans. Penalty, if any, for delayed
payment shall be applied on the overdue amount and not on the entire loan amount.

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 14. Simplified Factsheet - All organization shall disclose pricing related information to a prospective
borrower in their vernacular language through a standardised simplified factsheet. Standardised
simplified factsheet should have the following information:
 Date
 Lender’s name
 Applicant’s name
 Loan amount (amount disbursed to the borrower) (in Rupees)
 Total interest charge during the entire tenure of the loan (in Rupees)
 Other up-front charges (break-up of each component to be given below) (in Rupees)
 Processing fees (in Rupees)
 Insurance charges (in Rupees)
 Others (if any) (in Rupees)
 Net disbursed amount (Loan amount - Other up-front charges) (in Rupees)
 Total amount to be paid by the borrower (4+5+6) (in Rupees)
 Effective annualized interest rate (in percentage) (computed on net disbursed amount using
IRR approach and reducing balance method)
 Loan term (in months)
 Repayment frequency by the borrowers (monthly or weekly etc.)
 Number of instalments of repayment
 Amount of each instalment of repayment (in Rupees)
 Penal charges in case of delayed payments (if any)
 Other charges (if any)

15. Net Owned Fund Requirement -

NBFCs Current NOF By March 31, 2025 By March 31, 2027

NBFC-MFI ₹5 crore (₹2 crore in NE Region) ₹7 crore (₹5 crore in NE Region) ₹10 crore

16. The minimum requirement of microfinance loans for NBFC-MFIs also stands revised to
75 per cent of the total assets. Under the earlier guidelines, an NBFC that does not
qualify as an NBFC-MFI, cannot extend microfinance loans exceeding 10 per cent of its
total assets. The maximum limit on microfinance loans for such NBFCs (i.e., NBFCs other
than NBFC-MFIs) now stands revised to 25 per cent of the total assets.

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COMPARATIVE ANALYSIS
Basis of
Extant Guideline
Comparison
Household Loan which is disbursed to a
Income borrower with household
annual income not exceeding
₹1,25,000 and ₹2,00,000 for
rural and urban/semi-urban
households, respectively;
Definition of A group of persons normally
Household living together and taking food
from a common kitchen will
constitute a household.
Qualifying NBFC-MFI is required to have
Asset Criteria minimum 85% of its net assets
as ‘qualifying assets’.
Indebtedness Total indebtedness of the
of a Borrower borrower does not exceed
₹1,25,000 (excluding loan for
education and medical
expenses);
Tenure of the Minimum tenure of 24 months
Loan for loan amount exceeding
₹30,000/-
Nature of Loan Collateral Free
Net Owned ₹5 crore (₹2 crore in NE Region)
Fund
Requirement
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Revised Guidelines
A microfinance loan is defined as a
collateral-free loan given to a household
having annual household income up to
₹3,00,000/.
The household shall mean an individual
family unit, i.e., husband, wife, and their
unmarried children.
Minimum requirement of microfinance
loans for NBFC-MFIs also stands revised to
75% of the total assets.
No restriction on loan amount or total
outstanding or number of loans or number
of lenders subject to that: Monthly
repayment obligations relating to all loans
liabilities to monthly household income
(FOIR) shall not exceed 50% or any lower
limit fixed by Lender
Lender is free to fix tenure as per borrower
capability subject to FOIR compliance.
Collateral Free
₹7 crore (₹5 crore in NE Region) By March
31, 2025
₹10 crore By March 31, 2027
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 Repayment Flexibility of repayment Flexibility of repayment periodicity (weekly,
Frequency periodicity (weekly, fortnightly, fortnightly or monthly) at borrower’s choice
or monthly) at borrower’s choice

Number of Not more than two NBFC-MFIs No limit on lenders

Lenders should lend to the same
borrower.

Processing Processing charges shall not be The processing fee rate deregulated.
Charges more than 1% of gross loan
amount.

Pricing of Fixed effective annual interest New interest rate model which includes cost
Loan rate decided based on of funds, margin and risk premium, where
risk premium will be decided on gradation of
• cost of funds + 10% or 2.75
risk, thus charging different rate of interest
times of average PLR of 5
to different categories of borrowers.
largest commercial Banks,
whichever is lower. The rationale will be disclosed in application
and sanction and also publicly through
• Quarterly average interest
website and notice.
rate charged not being more
than quarterly average cost
of funds of previous quarter
+ 10%

• Processing charge fixed at

1%

• actual insurance cost

Prepayment Collateral free loans without any There shall be no pre-payment penalty on
Penalty prepayment penalty; microfinance loans. Penalty,

if any, for delayed payment shall be applied

on the overdue amount and not on the
entire loan amount.

Loan Minimum 50 per cent of Loans, irrespective of end use

Utilisation aggregate amount of loans for
income generation activities

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CASE STUDIES - CFA
Case Study 1.

Mrs. Vaishali Singh is a resident of Udaipur, Rajasthan. She lives with her husband, two unmarried sons
and an unmarried daughter, 24 years, 22 years and 18 years respectively. Her husband owns a grocery
shop and average sells Rs. 2000/- worth of product in a day and his average margin is 10%. Mrs. Vaishali
owns two crossbreed cows, and she sells 7 litters of milk per day at Rs. 50/- per litter. Her average
expenditure per day is 50% of her income. She has 2 acres of land, which is used for cultivating paddy,
from which she annually earns Rs. 30,000/-, out of which 60% is the expenditure cost. Her son is working
in Surat, Gujarat and sends average of Rs. 6000/- per month. Mrs. Vaishali’s daughter gives tuitions to
children of her village and earns Rs. 3000/- monthly. She has taken loan of Rs. 40,000/- from Bharat
Finance paying weekly. She pays the EMI amount of Rs. 3600/- per month (900*4).

Case Study 2

Our staff went to Parthapur village for collection. One lady came to him and asked him for a loan. She said
she need a loan so that she can start her own masala business. Our staff asked her a few details about her
family, income, house, etc. she said that she has a family of 6 members. She is living with her in-laws,
husband, and two kids. Her husband is a farmer and he is the only earning member of the family. His
monthly income is not fixed but on average his income is 12,000 per month. While talking our staff visited
her house. That was a pakka house with all the basic amenities like a fan, TV, bathroom, etc.

Then our staff asked about their monthly expenditure. Regularly a month they spend on their food,
electricity, gas, phone recharge, etc. Added to that they had a loan from another MFI of RS. 50,000 that
they took 2years back because of which every month they are paying RS. 1500. Then our staff asked about
education expenses for the children and medical expenses for her in-laws as they are quite old. So, she
said her daughter is getting a scholarship of 5000 per month and her father-in-law was a postmaster so
he is getting his pension of RS. 8000 per month.

1. What is their monthly income?

2. Can we give loan to this family?

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NOTES

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