What changed
RBI issued a master circular consolidating all NBFC-MFI directions effective December 2, 2011, creating a separate NBFC category for microfinance institutions. It defined NBFC-MFIs as non-deposit taking NBFCs with minimum net owned funds of ₹5 crore (₹2 crore for North Eastern Region) and at least 85% of net assets as qualifying assets. Qualifying assets must meet borrower income limits (rural ₹60,000; urban/semi-urban ₹1,20,000), loan caps (first cycle ₹35,000; subsequent ₹50,000), total indebtedness cap of ₹50,000, and minimum tenure of 24 months for loans above ₹15,000 with prepayment without penalty.
What it means for you
Banks and lenders dealing with NBFC-MFIs must ensure their microfinance partners comply with these new prudential norms, including asset composition and borrower eligibility criteria. Existing NBFCs with microfinance operations need to reclassify as NBFC-MFIs or adjust portfolios to meet the 85% qualifying asset threshold. The circular provides a clear regulatory framework, reducing ambiguity for lenders and investors in the microfinance space.
What you must do
- Review your NBFC portfolio to identify entities that meet NBFC-MFI criteria and ensure they are classified correctly.
- Update credit and risk policies to incorporate the qualifying asset definitions and borrower income/loan caps when lending to or investing in NBFC-MFIs.
- Monitor compliance with the 85% net assets in qualifying assets condition for any NBFC-MFI counterparty.
- Ensure loan documentation reflects the minimum tenure and prepayment penalty prohibition for loans above ₹15,000.
Who it affects
All NBFCs (excluding RNBCs) with microfinance operations, Banks lending to or investing in NBFC-MFIs, Microfinance borrowers and field staff, Regulatory compliance teams at NBFCs
What is the minimum net owned funds requirement for an NBFC-MFI?
The minimum net owned funds is ₹5 crore, except for NBFC-MFIs registered in the North Eastern Region where it is ₹2 crore.
What are the key borrower eligibility criteria for a loan to be a qualifying asset?
Borrower annual income must not exceed ₹60,000 for rural households or ₹1,20,000 for urban/semi-urban households. Loan amount is capped at ₹35,000 for the first cycle and ₹50,000 for subsequent cycles, with total indebtedness not exceeding ₹50,000.
Does this circular apply to all NBFCs?
No, it applies to all NBFCs excluding RNBCs (Residuary Non-Banking Companies), but specifically to those that meet the definition of NBFC-MFI.