MFIs Seek Relaxations in RBI's 2022 Regulatory Framework

New Delhi, Oct 16 (KNN) Microfinance institutions (MFIs) in India have approached the Reserve Bank of India (RBI), requesting relaxations in the regulatory guidelines introduced in 2022.

The move comes as industry players grapple with restrictions on asset deployment and lending flexibility under the revised framework, three sources familiar with the matter told businessline.

Previously, MFIs were required to maintain at least 85 per cent of their net assets—total assets excluding cash, bank balances, and money market instruments—as qualifying loans.

However, the 2022 revision mandated that at least 75 per cent of the total assets of MFIs must now be in the form of microfinance loans.

Industry representatives argue that the shift to total assets limits their ability to park funds in other avenues, reducing their returns.

Accordingly, they are requesting that the RBI either revert to the earlier 85 per cent criterion based on net assets or lower the current minimum lending requirement from 75 per cent to 60 per cent of total assets.

“The current framework restricts lending flexibility, especially for loyal borrowers who have successfully repaid multiple loan cycles,” one industry source said. “If such borrowers seek higher-ticket loans—for housing or business—MFIs should be able to service them as microfinance loans, not just under non-qualifying assets.”

Additionally, the current norm limits microfinance lending to households with annual incomes up to Rs 3 lakh and caps borrower repayment outflows at 50 per cent of monthly income.

Some players argue that the regulator could explore more flexibility to include higher-value loans within the qualifying MFI loan category.

Another key request is the uniform allowance for e-KYC across all MFIs, which would streamline the loan sanctioning process.

The RBI has acknowledged the industry's feedback, with Deputy Governor M. Rajeshwar Rao recently stating that the regulator will review the guidelines “at an appropriate time.” However, RBI remains cautious, as it continues to monitor signs of over-leverage in the sector.

Reports suggest that in certain regions, borrowers have taken loans from more than five MFIs, raising concerns about debt overload.

Additionally, since the RBI removed caps on loan pricing in 2022, there have been instances of MFIs charging interest rates as high as 40-45 per cent.

The regulator is evaluating whether adjustments to the framework are warranted, balancing the need for operational flexibility with borrower protection. As of now, RBI has not issued an official response to the industry’s requests.

This evolving regulatory discussion highlights the tension between supporting MFI growth and ensuring responsible lending practices in India’s microfinance sector.

(KNN Bureau)