Reserve Bank of India (RBI) once again made announcements regarding the regulatory framework on microfinance loans. RBI has done away with the margin caps on the pricing of small loans given by non-banking financial company-microfinance institutions (NBFC-MFIs).

Earlier, as far as the limit was concerned, there was a limit on the charge per unit charged by microfinance lenders. The most rate of interest was 10-12% above the price of funds incurred by the institution or 2.75 times the common interest rate of the five-largest commercial banks, whichever is lower.

Now, the removal of margin caps brings NBFC-MFIs to the identical level as other lenders like banks. This can pave the way for the underwriting of loans supported risk analysis. Also, betting on the borrower, a risk premium is often charged by the lenders.

According to the new directions, all microfinance lenders must bring out a board-approved policy regarding the pricing of loans.

A detailed rate of interest model should be prescribed within the policy document, which has various components of rate, like the cost of funds, risk premium, margin, etc. The policy document should also mention a ceiling on the rate and everyone other charges applicable to microfinance loans.

The new directions provide flexibility to lenders. as an example, a lender can charge a low-interest rate on loans, if there’s access to low-cost funds. On the opposite hand, if there’s no access to low-cost funds, the next rate of interest is charged on loans.

Annual household income criteria to avail microfinance level have been raised to ₹3 lakh. Thus, the market size of microfinance lending is increased. Earlier, the limit to avail microfinance loans was ₹.25 lakh in rural areas and ₹2 lakh in other areas.

To curtail over-lending to customers, RBI has put a cap on repayment value to 50% of the monthly household income. The financial institution has also said that there’ll not be any prepayment penalties on microfinance loans