Legal and Regulatory Framework for Microfinance
The regulatory layers
Microfinance is regulated by several instruments, not one Act. RBI regulates banks and NBFC-MFIs under the RBI Act, 1934 and its Master Direction on the Regulatory Framework for Microfinance Loans (2022). Not-for-profit MFIs are registered under the Societies Registration Act, 1860, Indian Trusts Act, 1882 or Section 8 of the Companies Act, 2013. State Money Lending Acts apply to money lending, and states such as Andhra Pradesh enacted dedicated MFI laws after 2010. A central Microfinance Institutions (Development and Regulation) Bill was proposed but not enacted.
Key RBI rules
- Microfinance loan: collateral-free loan to a household with annual income up to ₹3,00,000.
- Board-approved policy covering eligibility, pricing, conduct and grievance redressal.
- Repayment obligations across all loans not to exceed 50% of monthly household income.
- No collateral and no prepayment penalty; transparent disclosure of interest and charges.
- NBFC-MFI: at least 75% of total assets must be microfinance loans.
- RBI no longer fixes an interest-rate cap for NBFC-MFIs; pricing must be transparent and board-approved.
Other requirements
NBFC registration under Section 45-IA of the RBI Act; KYC; credit bureau reporting; fair practices; SRO membership commonly with Sa-Dhan or MFIN and their codes.
Worked example
An NBFC has total assets of ₹100 crore. Microfinance loans are ₹70 crore, or 70%. It fails the 75% test and cannot be classified as an NBFC-MFI. If it raises microfinance loans to ₹80 crore, it meets the test. A ₹3.5 lakh loan to a household is not a microfinance loan and cannot be counted in the numerator, even if the borrower is poor by other measures.
Traps
Do not claim RBI currently caps MFI interest rates; the 2022 framework removed the earlier pricing caps. Do not require collateral. Do not confuse an NBFC-MFI with a bank or a cooperative. Do not ignore state money-lending registration.