Definition of Microfinance Loans simplified; various quantitative restrictions on loans eased

Sa-Dhan and MFIN launched to Strengthen Compliance culture and Limit borrower Indebtedness in Microfinance Sector

National Bank for Agriculture and Rural Development (NABARD) and Reserve Bank of India (RBI) have undertaken various interventions to promote financial literacy and awareness of rural population, including microfinance borrowers.

This is promoted through following initiatives:

1. NABARD has been providing financial support for conduct of Financial and Digital Literacy Camps through rural bank branches and Financial Literacy Centres (FLCs) in areas with limited awareness. These programmes entail generating awareness on various banking products, social security schemes of Government of India, digital banking, mobile banking, cyber security, etc.
2. Centre for Financial Literacy (CFL) Project has been initiated by RBI since 2017 with an objective to adopt community-led innovative and participatory approaches to financial literacy. A total of 2,421 CFLs have been set up across the country as on March 31, 2025 with one CFL covering three blocks on an average 
3. NABARD also sponsors Village Level Programmes (VLPs) which are conducted with the support of banks and State Rural Livelihoods Missions (SRLMs) for a better interface between bankers and Self-Help Groups (SHGs) to facilitate opening of SHG accounts, their credit linkage and regular loan repayments, thereby facilitating financial inclusion at the village level.

The following steps have been taken by RBI for enabling ease of access to credit (in the microfinance sector):

1. The definition of microfinance loan has been simplified and various quantitative restrictions on loans given by NBFC-MFIs have been removed, including limits on loan amount in a particular cycle and minimum tenure for loans over a particular threshold. Presently, all collateral-free loans given to a household having annual household income up to ₹3,00,000 are considered as microfinance loans.
2. Erstwhile requirement of providing minimum 50% loans for income generation purposes has been dispensed with, considering the need of credit for medical, educational and income smoothening purposes.

Further, RBI has taken following steps to enhance borrower protection:

1. A ceiling of 50% on the monthly loan repayment obligations as a percentage of monthly income has been prescribed to protect customers from over in debtedness.
2. RBI has issued specific guidelines for recovery processes which has to be followed by REs which ensure protection to the borrowers against harsh recovery methods. REs are required to have a dedicated mechanism for redressal of recovery related grievances.

RBI has informed that interest rates charged to microfinance borrowers by all the REs, including banks which had access to low-cost funds, hovered around the regulatory ceiling introduced by RBI from time to time. Hence, on March 14, 2022, a revised principle-based regulatory framework for microfinance loans was issued which deregulated the interest rates on such loans with an intent to let the competitive forces of the market bring down interest rates over a period of time. Hence, REs are required to have a board-approved interest rate policy with clearly delineated components. Further, the RBI’s regulations prescribe that interest rates and other charges shall not be usurious.

SROs for the microfinance sector, viz. Sa-Dhan and Microfinance Industry Network (MFIN), play a major role in strengthening compliance culture among their members viz. Micro Finance Institutions (MFIs) including NBFC-MFIs and also provide a consultative platform for policy making. One of the functions of SROs is continuous monitoring of the activity and level of compliance of their members with the regulations. Through constant interaction with the Regulator and submission of periodic/ad-hoc information, the SROs provide insights on the industry practices including non-compliances observed which help appropriate regulatory and supervisory interventions.

Further, Sa-Dhan and MFIN, have issued guardrails for their members, inter alia, capping the total indebtedness of a borrower as well as limiting the number of lenders that can give loans to a single borrower. Such interventions aid in reducing the indebtedness of the borrowers.

RBI has issued guidelines on credit information reporting by credit institutions (CIs) to credit information companies (CICs). CIs are required to submit the income and credit data pertaining to microfinance borrowers to CICs. Apart from household income, the details of all the loans availed by such borrowers are published in the credit information report. CIs utilise such information for assessing the indebtedness of the borrowers thereby preventing over indebtedness by capping repayment obligations within the regulatory limit of 50% of monthly household income.

This information was given by Minister of State in the Ministry of Finance Shri Pankaj Chaudhary in a written reply to a question in Rajya Sabha today.

Microfinance loan definition changed: deregulated interest rate framework paired with caps on repayment obligations to limit indebtedness. Definition and regulatory framework for microfinance lending have been restructured: all collateral free loans to households within the specified income threshold are treated as microfinance loans, quantitative restrictions on NBFC MFIs have been removed, and the prior requirement for a minimum share of income generation loans has been dispensed with. Regulators require board approved interest rate policies, prohibit usurious charges, prescribe a ceiling on monthly repayment obligations as a percentage of household income, mandate borrower protection recovery guidelines and grievance mechanisms, and require credit institutions to report income and loan data to credit information companies to prevent over indebtedness.