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
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.