The RBI issued the RBI (Regulatory Framework for Microfinance Loans) Directions, 2022 (‘ML Directions’), effective from April 1, 2022. The salient features of the Directions are:

1. Applicability: The ML Directions apply to the following entities (‘Regulated Entities’) providing a collateral-free loan to a household having an annual income of up to ₹3 million (approx. US$ 3,918). (‘Microfinance Loans’): (a) commercial banks (including small finance banks, local area banks, and regional rural banks) excluding payments banks; (b) primary (urban) co-operative banks / State co-operative banks / district central co-operative banks; and (c) NBFCs (including microfinance institutions and housing finance companies).
2. Board-approved Policy: Each Regulated Entity must have a board-approved policy in place for, amongst other things, assessment of household income, for pricing of Microfinance Loans and to provide flexibility of repayment periodicity as per borrowers’ requirement.
3. Limit on Loan Repayment Obligations of a Household: Loan repayment obligations (including principal and interest thereon) for all outstanding loans (i.e., collateral-free microfinance loans and any other collateralised loans) of a household cannot exceed 50% of the monthly household income.
4. Pricing of Microfinance Loans: Interest rates and other charges / fees on Microfinance Loans should not be usurious. Pricing related information is to be disclosed to a prospective borrower in the prescribed format.
5. Fair Practices Code: Each Regulated Entity has to put in place a board-approved fair practices code based on the Directions, to be displayed in all its offices and on its website. Each Regulated Entity must also provide a loan card to the borrower which must incorporate, amongst other things, information adequately identifying the borrower, factsheet on pricing, terms and conditions of the loan, etc.
6. Guidelines Related to Recovery of Loans: Each Regulated Entity must put in place a mechanism for identification of the borrowers facing repayment related difficulties, engagement with such borrowers and providing them necessary guidance about recourse available. No harsh methods towards recovery should be adopted by the Regulated Entity or their agents.