Main Note - [NBFCs](NBFCs.md) 1. Oct 15, 2010 - The Board of Directors of the Reserve Bank of India, at its meeting held on October 15, 2010 (as mentioned in Malegam Committee Report, 2011) [constituted](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6071&Mode=0#:~:text=However%2C%20considering%20the,Sharma%20Working%20Group) a Sub-Committee (Chairman: Shri Y. H. Malegam) of the Board to study issues and concerns in the microfinance sector. 2. [Oct 19, 2010](RBI_Press%20Release_20101019_RBI%20Sub-Committee%20to%20study%20Issues%20and%20Concerns%20in%20MFI%20Sector.pdf)- RBI announced the set up of this committee, acknowledging the microfinance crisis in the state of Andhra Pradesh. 1. In the Second Quarter Review of October 2009, a Working Group was constituted (Chairman: Shri V. K. Sharma) to examine the pros and cons of priority sector lending certificates (PSLCs) as recommended by the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan). 2. In Monetary Policy Statement of April 2010, the terms of reference of the Working Group were expanded to review the pros and cons of inclusion of bank lending to micro-finance institutions (MFIs) under priority sector lending. 3. The Malegam committee also took into account the recommendation of the Sharma Working Group. [^1] 3. [Oct 28, 2010](RBI_Press%20Release_20101028_RBI%20Sub%20Committee%20of%20the%20Central%20Board%20of%20Directors%20to%20study%20Issues%20and%20Concerns%20in%20MFI%20Sector.pdf) - The Sub-Committee of the Reserve Bank’s Central Board of Directors finalised its terms of reference. 4. [Jan 19, 2011](RBI_Press%20Release_20110119_RBI%20releases%20Report%20of%20the%20Sub-Committee%20of%20its%20Central%20Board%20of%20Directors%20to%20study%20Issues%20and%20concerns%20in%20the%20MFI%20Sector.pdf) - The Committee's [report](RBI_Group-Committee_20110119_Report%20of%20the%20Sub-Committee%20of%20the%20Central%20Board%20of%20Directors%20of%20of%20Reserve%20Bank%20of%20India%20to%20Study%20Issues%20and%20Concerns%20in%20the%20MFI%20Sector.pdf) was published by the RBI. 5. [May 3, 2011](RBI_MPS_201105_FY11-12.pdf) - In the Monetary Policy Statement 2011-12, governor Dr. D. Subbarao, announced that the broad framework of regulations recommended by the Committee has been accepted by the Bank. 6. [December 02, 2011](RBI_Notification_20111202_Introduction%20of%20New%20Category%20of%20NBFCs%20-%20‘Non%20Banking%20Financial%20Company-Micro%20Finance%20Institutions’%20(NBFC-MFIs)%20-%20Directions.pdf) - A new category of NBFC ‘Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) was created, increasing the total types of NBFCs increased to 7. 1. MFI loan was defined as a loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding  Rs. 1,20,000 2. Margin cap, the difference between interest charged to the customer and borrowing cost of the NBFC-MFI was capped at 12% for all NBFC-MFIs and would be scrutinized for every fortnightly as follows: - **Interest Rate Charged <= Cost of Funds + Margin of 12%** *(Aggregate margin cap was fixed at 12%)* ==Interest income is to be calculated on average fortnightly (14 days) balances of outstanding loan portfolio of qualifying assets and the the Interest cost is to be calculated based on average fortnightly balances of outstanding borrowings.== - **Interest Rate Charged** = (Total Interest Income/Average daily balances of outstanding loan portfolio of qualifying assets) over a reporting fortnight/14 days. - **Cost of Funds** = (Total Interest Cost /Average daily balances of outstanding borrowings) over a reporting fortnight/14 days. Note that this real margin, which is a weighted average, is different from NIM (Net Interest Income-NII/Average Earning Assets). 3. Maximum interest on individual loans was set at 26% p.a. and it was to be calculated only on a reducing balance basis. 4. Here margin = interest income is to be calculated on average fortnightly balances ($B_1$, $B_2$...at the end of day for a fortnight) of outstanding loan portfolio of qualifying assets $-$ and the interest cost will be calculated on average fortnightly balances of outstanding borrowings. 5. $\displaystyle \text{Average Interest Cost for the fortnight}=\frac{\text{Total Interest Expense}}{\frac{1}{14}\sum_{i=1}^{14} B_i}\quad \text{and}\text{ Average Borrowings}=\frac{1}{14}\sum_{i=1}^{14} B_i$ 7. [Aug 03, 2012](RBI-Notification_20120803_Non%20Banking%20Financial%20Company-Micro%20Finance%20Institutions%20(NBFC-MFIs)%20–%20Directions%20–%20Modifications.pdf) - Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) – Directions – Modifications were issued. Some of these [modified guidelines](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=7493#5) for NBFC-MFIs were: 1. It **removed the maximum interest rate cap of 26%** on individual loans but with conditions like: 1. For the financial year, average interest rate on loans <= 12% + average borrowing cost. This will be based on average monthly balances of outstanding borrowings and loan portfolio. 2. The difference between the minimum and maximum interest rate cannot exceed 4 per cent. 2. The hope was that it would allow NBFC-MFIs having higher borrowing costs to operate on viable lines and also help borrowers benefit in case of lower rates. 3. Cap on margins as defined by Malegam Committee may not exceed 10% for large MFIs (loans portfolios exceeding Rs.100 crore) and 12% for the others. 4. Margin = the average interest rate on loans during a financial year $-$ average borrowing cost during that financial year 5. The average interest paid on borrowings and charged by the MFI are to be calculated on average monthly balances of outstanding borrowings and loan portfolio respectively. 8. [May 31, 2013](RBI_Notification_20130531_‘Non%20Banking%20Financial%20Company-Micro%20Finance%20Institutions’%20(NBFC-MFIs)%20–%20Directions%20–%20Modifications%20in%20Pricing%20of%20Credit%20-%20Margin%20cap.pdf): 1. margin cap for all NBFCs irrespective of their size was fixed at 12%, and till March 31, 2014, and 2. with effect from 1st April, 2014 margin caps as defined by Malegam Committee may not exceed 10 per cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per cent for the others. 9. [Feb 7, 2014](RBI_Notification_20140207_‘Non-Banking%20Financial%20Company-Micro%20Finance%20Institutions’%20(NBFC-MFIs)%20–%20Directions%20–%20Modifications%20in%20Pricing%20of%20Credit.pdf) - An [additional criteria](https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=2494) was introduced for pricing of loans by NBFC-MFI. It was decided that the interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following: 1. The cost of funds $+$ margin as indicated in the company circular DNBS. (PD)CC.No.300/03.10.38/2012-13 dated August 3, 2012 read with [circular DNBS(PD) CC.No.327/03.10.038/2012-13 dated May 31, 2013](https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8011&Mode=0); or 2. The average base rate of the five largest commercial banks by assets multiplied by 2.75. 3. The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. >Note that these *regulatory ceiling on pricing of loans were applicable only to NBFC-MFIs* and not other lenders. Over the years, RBI modified its loan pricing policies. 10. April 1, 2014 1. April 1, 2014 margin caps as defined by Malegam Committee may not exceed 10 per cent for large MFIs (loans portfolios exceeding Rs.100 crore) and 12 per cent for the others. 11. [Apr 10, 2014](RBI_Press%20Release_20140410_RBI%20releases%20Report%20on%20‘Working%20Group%20on%20Pricing%20of%20Credit’.pdf) - RBI released the [report](RBI_Group-Committee_20140410_Report%20of%20the%20Working%20Group%20on%20Pricing%20of%20Credit.pdf) of Working Group on Pricing of Credit. 12. [Feb 7, 2014](RBI_Notification_20140207_‘Non-Banking%20Financial%20Company-Micro%20Finance%20Institutions’%20(NBFC-MFIs)%20–%20Directions%20–%20Modifications%20in%20Pricing%20of%20Credit.pdf) - Effective April 1, 2014, a formula based cap was prescribed. So before April 1, 2014, the upper cap on loans by MFI was 26% 13. September 01, 2016 - RBI asked NBFC-MFIs to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that financial year plus the margin, within the prescribed cap. 14. [February 02, 2017](RBI_Notification_20170202_Review%20of%20Guidelines%20on%20Pricing%20of%20Credit.pdf) - the guidelines on "Pricing of Credit" was changed 1. NBFC-MFIs were asked to ensure that the average interest rate on loans sanctioned during a quarter does not exceed the average borrowing cost during the preceding quarter plus the margin, within the prescribed cap. 15. [Feb 5, 2021](RBI_MPS_SDRP_20210205.pdf#page=3&selection=38,0,38,51) -  In the Statement on Developmental and Regulatory Policies announced as a part of the [Bi-monthly Monetary Policy Statement for 2020-21](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51077) dated February 5, 2021, RBI announced its plan to harmonise the regulatory frameworks for various regulated lenders in the microfinance space, and release a consultative document by March 2021. >[!Tip]- In Jun-21, the Department of Regulation of the RBI published a [**consultative paper**](https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20377) on the regulation of microfinance. > *In his [inaugural address](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20625), M. Rajeshwar Rao, Deputy Governor, Reserve Bank of India, on October 27, 2021, at Sa-Dhan National Conference on “Revitalising Financial Inclusion”, observed that limited competition due to ceiling on lending rate for NBFC-MFIs and the rates offered by NBFC-MFIs influencing the lending by other lenders with (lower cost of funds) in micro-finance were downsides to the prescription of a ceiling on lending rates exclusively to NBFC-MFIs. Even larger NBFC-MFIs were unable to pass down lower rates. > Even though banks, were benchmarking all new floating rate personal or retail loans to an external benchmark from October 1, 2019 , this kind of pricing was not introduced for NBFCs, including NBFC-MFIs, yet. ==Due to difference in costs among the lenders in the micro finance space, any specific benchmark or any spread over a benchmark was unlikely to remove the constraints observed in the current system.== As a result, it is the borrowers who may be getting deprived of the benefits of competition, monetary policy impulses as well as economies of scale.* - **With a ceiling**, it was seen that the competitive effect on rates was **muted** because lenders were tending to cluster near the cap, even if they could lower rates. The fear of losing customers was outweighed by the comfort of higher margins under the ceiling. The cap acted like a psychological anchor. - **Without a ceiling**, the hope was competition would become more intense as there’s no artificial upper limit to anchor pricing behavior, and lenders would rely on **real market forces** to adjust their rates. This could push rates lower and drive more effective competition. ==Even though the average base rate of top 5 banks fell as a response to COVID-19, the lending rate of microfinance had seen just a marginal decline.== Hence, in 2021, MFIN, an association for NBFC-MFIs (recognised by the RBI in 2014 as India’s first Self-Regulatory Organization(SRO) for the NBFC-MFIs), [represented to the RBI](https://mfinindia.org/assets/upload_image/publications/AnnualReports/MFIN%20AR%202020-21%203.9.2021.pdf) about "unsuitability" of the base rate formula. This trend as observed in the data, further demanded a uniform regulation for all the entities providing microfinance. RBI accepted the suggestions by MFIN, and initiated an internal discussion over the pricing of these loans. 16. ==March 14, 2022 - After a thorough internal analysis, RBI announced a new framework and issued the Master Direction – [Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022 *(WITHDRAWN)*](RBI_Master%20Directions_20220314_Master%20Direction%20–%20Reserve%20Bank%20of%20India%20(Regulatory%20Framework%20for%20Microfinance%20Loans)%20Directions,%202022.pdf), deregulating pricing *(interest charged)* of microfinance loans, effective from April 01, 2022.== 1. Apart from NBFC-MFI, the provisions of these directions were applicable to other entities as well. 2. All [collateral-free loans](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12256#:~:text=All%20collateral%2Dfree%20loans%2C%20irrespective%20of%20end%20use%20and%20mode%20of%20application/%20processing/%20disbursal%20(either%20through%20physical%20or%20digital%20channels)%2C%20provided%20to%20low%2Dincome%20households%2C%20i.e.%2C%20households%20having%20annual%20income%20up%20to%20%E2%82%B93%2C00%2C000%2C%20shall%20be%20considered%20as%20microfinance%20loans.), irrespective of end use and mode of application/ processing/ disbursal (either through physical or digital channels), provided to households having annual income up to ₹3,00,000 would be considered as micro-finance loans. 3. It removed the two caps; margin cap and the maximum interest rate allowed on individual loans. 4. All the entities providing micro-finance loans were asked to formulate a board-approved policies on all-inclusive rates, which included information like[^1] minimum, maximum, and average interest rates charged by them. 5. It also mentioned that interest rates and other charges/fees on microfinance loans [**should not be usurious**](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12256#:~:text=Interest%20rates%20and%20other%20charges/%20fees%20on%20microfinance%20loans%20should%20not%20be%20usurious.%20These%20shall%20be%20subjected%20to%20supervisory%20scrutiny%20by%20the%20Reserve%20Bank.). ==These shall be subjected to supervisory scrutiny by the Reserve Bank.== 6. With this, the expectation was to see market forces come into play and eventually bring down the borrowing cost for microfinance sector. [^1]: [A document by SBI on its Microfinance Loan Policy, with instruction issued up to 18.10.2022 by Bank/Regulatory Authority](https://sbi.co.in/documents/14463/22577/20012023_Mircorfinance+Loan+Policy+for+Publication.pdf) 17. [Feb 2023](https://sansad.in/getFile/loksabhaquestions/annex/1711/AU472.pdf?source=pqals) - Government of India, Ministry of Finance, Lok Sabha, Unstarred Question No. 472, answered on 06 February 2023 – Interest Rates Charged by NBFCs 18. June 17, 2024 - In its [Annual Report for 2023-2024](MFIN_Annual%20Report_20240617_2023-2024.pdf), [MFIN](https://mfinindia.org/) observed that even after this deregulation of pricing of microfinance loans, the rate of interest charged on microfinance loans had increased in 4 year period from FY19-20 to FY22-23. This was mainly on account of **increase in credit cost during Covid as also expansion to new areas and addition of new clients**. The sector added 66 lakh new clients in FY22-23 and another 1 crore in FY23-24, which was stagnant for previous 3 years. 19. [Oct 7, 2024](RBI_Press%20Release_20241017_Action%20against%20select%20NBFCs%20including%20NBFCs-MFIs.pdf) - RBI release a press release with directions to the few NBFCs including NBFC-MFIs to cease and desist from sanction and disbursal of loans, effective from close of business of October 21, 2024. 1. The action was regards to the pricing of the loans as both the lending rate measured as *weighted average lending rate* and the *Interest Spread* charged over their cost of funds were found to be unfair. ## Related Notes 1. [NBFCs](NBFCs.md) ## Data Releases 1. Appendix Table IV.13: Progress of Microfinance Programmes - Annual report [Trend and Progress of Banking in India](https://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend%20and%20Progress%20of%20Banking%20in%20India) ## References ### [[Speeches & Media Interactions|Speeches]] 1. [Micro-Finance : Reserve Bank’s Approach](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=206) - Speech by Dr. Y.V. Reddy, Governor, RBI at the Micro-Finance Conference organized by the Centre for Analytical Finance, Indian school of Business Hyderabad on August 6, 2005 2. [Microfinance as the next wave of Financial Inclusion](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1088) - Speech by Shri M. K. Jain, Deputy Governor, Reserve Bank of India, delivered on November 26, 2019 at the SIDBI National Microfinance Congress 2019 at Mumbai ### [[Publications (Data Releases) & Research#Publications|Publications]] 1. RBI (DoR). (Jun 14, 2021). Consultative paper on the regulation of microfinance. Occasional/Discussion Papers. [pdf](RBI_Discussion%20Papers_20210614_Consultative%20Document%20on%20Regulation%20of%20Microfinance.pdf) 2. RBI. FAQs-Regulatory Framework for Microfinance Loans. [Link](https://www.rbi.org.in/Scripts/FAQView.aspx?Id=147) ### [Press Releases & Notifications](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx) 1. On October 19, 2023, RBI [Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023](https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12550). This replaced the two Master Directions: - [Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10585)  - [Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10586), [More References](NBFCs.md#References)