Sep 30, 2022RBI Publishes FAQs for Regulations on Microfinance Loans
The RBI had published the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 (‘Master Direction’) on March 14, 2022. Pursuant to the same, RBI published the ‘Frequently Asked Questions’ (‘FAQs’) on the regulatory framework for microfinance loans on July 25, 2022 to address the common queries with respect to the Master Direction.
The Master Direction applies to (i) all commercial banks (including small finance banks, local area banks, and regional rural banks) excluding payments banks; (ii) all primary (urban) co-operative banks/ State co-operative banks/ district central co-operative banks; and (iii) all non-banking financial companies (including microfinance institutions and housing finance companies) (collectively ‘Regulated Entities’) with respect to a collateral-free loan given to a household having annual household income up to Rs 3,00,000 (‘Microfinance Loan’).
According to the Master Direction, the effective date for implementation of the regulations was April 1, 2022. However, the RBI has clarified in the FAQs that pursuant to difficulties faced by Regulated Entities in their implementation, Regulated Entities will take best efforts to comply with the Master Direction at the earliest, but not later than October 1, 2022.
Further, with respect to revision of interest rates applicable to existing loans, the RBI has clarified that the Master Direction is applicable to loans sanctioned on or after April 1, 2022. The pricing for loans sanctioned by non-banking financial companies (microfinance institutions) (‘NBFC – MFIs’) will continue to be governed by the guidelines applicable to such entities as on March 31, 2022. For other Regulated Entities, the revision and review of interest rates applicable to existing loans will be permitted subject to compliance with relevant guidelines.
Furthermore, the RBI has clarified that the guidelines contained in the Master Direction will only be applicable to the Regulated Entities. However, as regards other lenders operating in the microfinance sector (i.e., those not falling under the definition of ‘Regulated Entities’), RBI advised that it may be prudent for such lenders to follow the guidelines as well, given the customer centric nature of these guidelines.