The Reserve Bank of India (RBI) has recently revised a key provision under its regulatory framework governing microfinance loans. This change relates to paragraph 8.1 of the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022, which lays down the “Qualifying Assets Criteria” for Non-Banking Financial Companies – Microfinance Institutions (NBFC-MFIs).
This revision is significant for stakeholders in the microfinance ecosystem, including lenders, investors, and borrowers, as it fine-tunes the regulatory expectations for NBFC-MFIs while promoting financial discipline and portfolio alignment with core microfinance objectives.
What Has Changed?
Under the original framework, NBFC-MFIs were required to ensure that a certain percentage of their total assets qualified as “microfinance loans.” With the latest amendment, paragraph 8.1 has been updated to align the definition of “qualifying assets” with the broader definition of “microfinance loans” provided in paragraph 3 of the Master Direction.
According to the revised paragraph 8.1:
“Qualifying assets of NBFC-MFIs shall constitute a minimum of 60 percent of the total assets (netted off by intangible assets), on an ongoing basis. If an NBFC-MFI fails to maintain the qualifying assets as aforesaid for four consecutive quarters, it shall approach the Reserve Bank with a remediation plan for taking a view in the matter.”
Implications of the Revised Norm
- Alignment with Core Microfinance Lending
The revision ensures that NBFC-MFIs continue to focus primarily on their core objective — lending to low-income households. By aligning “qualifying assets” strictly with “microfinance loans,” RBI is reinforcing that a minimum of 60% of an NBFC-MFI’s assets must consist of loans that meet the microfinance definition (i.e., small-value, unsecured loans to households with annual income below prescribed thresholds).
- Ongoing Compliance Mandate
The 60% threshold is not a one-time requirement but must be met on an ongoing basis. This ongoing compliance mandate ensures continuous adherence to the institution’s purpose and limits the diversion of resources toward non-core lending segments.
- Structured Response for Non-Compliance
Importantly, the RBI has introduced a remediation mechanism. If an NBFC-MFI fails to meet the qualifying asset requirement for four consecutive quarters, it is required to submit a remediation plan to the RBI. This plan should outline the institution’s strategy for realignment and corrective action.
This provision introduces both flexibility and accountability, allowing NBFC-MFIs the opportunity to course-correct without facing immediate regulatory penalties, while also keeping the regulator informed.
Strategic Considerations for NBFC-MFIs
- Portfolio Planning: NBFC-MFIs must closely monitor their asset composition and ensure that any expansion into other financial services does not dilute their qualifying microfinance loan ratio.
- Internal Controls: Institutions should strengthen internal compliance systems to regularly assess adherence to the 60% threshold.
- Risk Management: The remediation clause provides a buffer, but repeated non-compliance could affect regulatory goodwill and future licensing or expansion opportunities.
Conclusion
The RBI’s move to revise paragraph 8.1 of the Microfinance Directions, 2022 underscores its continued focus on ensuring that NBFC-MFIs remain aligned with their financial inclusion mandate. By reinforcing the minimum 60% qualifying asset requirement and providing a structured remediation path, the central bank is striking a balance between regulatory oversight and operational flexibility.
NBFC-MFIs should take proactive steps to align their portfolios, reinforce monitoring mechanisms, and stay compliant — not just to meet RBI norms, but to ensure sustainable and responsible microfinance delivery.
