MFI Loan Pricing Caps for Priority Sector Classification
Current · Source: Reserve Bank of India · RBI/2013-14/515 · issued 12 Mar 2014 · ~2 min read
Quick answerRBI tightened pricing norms for bank loans to MFIs under priority sector. From April 1, 2014, MFIs with loan portfolios exceeding Rs.100 crore face a maximum margin cap of 10%; others face 12%. Individual loan cap is the lower of 2.75 times the average base rate of the five largest commercial banks by assets (as advised by RBI) or cost of funds plus margin cap.
The rule, in the simplest words
Banks must ensure Microfinance Institutions (MFIs) follow the new margin caps to classify loans as priority sector
MFIs with loan portfolios over Rs.100 crore have a maximum margin cap of 10%, while smaller MFIs have a 12% cap
The individual loan pricing cap is the lower of 2.75 times the average base rate of the five largest commercial banks or cost of funds plus margin cap
Banks need to update their due diligence processes to ensure MFI partners meet the new thresholds
How it plays out — a real example
A priority sector lending officer in Mumbai needs to verify that the MFI they are lending to has a margin cap of 10% since the MFI's loan portfolio exceeds Rs.100 crore. The officer must also ensure the individual loan pricing cap is applied correctly, taking into account the average base rate of the five largest commercial banks. By doing so, the officer can classify the loan as priority sector and support the MFI's lending activities.
What changed
RBI revised the margin cap for MFIs: those with loan portfolios exceeding Rs.100 crore now have a maximum margin cap of 10%, down from the earlier uniform 12%. Smaller MFIs retain the 12% cap. The individual loan pricing cap remains the lower of 2.75 times the average base rate of the five largest commercial banks by assets (as advised by RBI) or cost of funds plus margin cap.
What it means for you
Banks must verify MFI compliance with these tighter caps to classify loans as priority sector. This reduces MFI profitability on larger portfolios, potentially affecting lending rates to end borrowers. Banks need to update their due diligence processes to ensure MFI partners meet the new thresholds.
What you must do
Update internal policies to reflect the new margin caps for MFIs based on portfolio size.
Ensure loan agreements with MFIs include clauses for compliance with the individual loan pricing cap.
Monitor MFI portfolio sizes regularly to apply the correct margin cap (10% for >Rs.100 crore, 12% for others).
Verify that MFIs' cost of funds and margin calculations align with RBI's prescribed formula.
Who it affects
All scheduled commercial banks (excluding RRBs) lending to MFIs, Microfinance institutions (MFIs) seeking priority sector classification for bank loans
❓ Common questions
What is the new margin cap for MFIs with loan portfolios above Rs.100 crore?
From April 1, 2014, the margin cap shall not exceed 10% for MFIs with loan portfolios exceeding Rs.100 crore, down from the earlier 12%.
How is the individual loan pricing cap calculated?
The cap is the lower of 2.75 times the average base rate of the five largest commercial banks by assets (as advised by RBI) or the MFI's cost of funds plus the applicable margin cap.
Do these changes affect existing loans?
The circular applies with effect from April 1, 2014. All other guidelines from the July 1, 2013 master circular remain unchanged.
📜 Read the original circular — full text as issued by RBI
RBI/2013-14/515
RPCD.CO.Plan.BC 91/04.09.01/2013-14
March 12, 2014
The Chairman/ Managing Director/
Chief Executive Officer
[All scheduled commercial banks
(excluding Regional Rural Banks)]
Dear Sir,
Priority Sector Lending-Targets and Classification-Bank loans to MFIs for on-lending-pricing criteria
Please refer to paragraphs VIII (c) (i) and (ii) of our master circular No. RPCD.CO.Plan.BC.9/04.09.01/2013-14 dated July 1, 2013 on Priority Sector Lending-Targets and Classification.
2. On a review of the above provision, it has been decided that banks have to ensure MFIs comply with the cap on individual loans and margin cap as under in order to be eligible to classify these loans under priority sector as under:-.
(i) Cap on individual loans: - The average Base Rate of five largest commercial banks by assets multiplied by 2.75 per annum or cost of funds plus margin cap, whichever is less. The average of the Base Rate shall be advised by Reserve Bank of India.
(ii) Margin cap: Further, with effect from April 1, 2014, the margin cap shall not exceed 10 percent for MFIs having loan portfolio exceeding Rs.100 crore and 12 percent for others, as against 12 percent for all hitherto.
3. All other guidelines in terms of Para VIII of circular No. RPCD.CO.Plan. BC.9/04.09.01/ 2013-14 dated July 1, 2013 will remain unchanged.
Yours faithfully,
(T.V.Rao)
Deputy General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/515 · issued 12 Mar 2014. The plain-English explanation above is BankPulse’s own independent summary.
Example: if you are a Compliance officer at a bank this circular applies to (All scheduled commercial banks (excluding RRBs) lending to MFIs, Microfinance institutions (MFIs) seeking priority sector classification for bank loans), your first concrete step on “MFI Loan Pricing Caps for Priority Sector Classification” is: “Update internal policies to reflect the new margin caps for MFIs based on portfolio size.” (RBI issued this 12 Mar 2014).
Action required: Update internal policies to reflect the new margin caps for MFIs based on portfolio size.
Action required: Ensure loan agreements with MFIs include clauses for compliance with the individual loan pricing cap.
Action required: Monitor MFI portfolio sizes regularly to apply the correct margin cap (10% for >Rs.100 crore, 12% for others).
Action required: Verify that MFIs' cost of funds and margin calculations align with RBI's prescribed formula.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=8767&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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