What changed
RBI introduced a separate regulatory category for microfinance, setting strict eligibility criteria for bank loans to MFIs to count as priority sector advances. Loans must now meet qualifying asset thresholds, income-generation ratios, and pricing caps on margin and interest. Non-compliant loans extended after April 1, 2011, will not be classified as priority sector.
What it means for you
Banks must verify MFI compliance with new norms before classifying loans as priority sector, increasing due diligence costs. The caps on margin (12%) and interest (26%) may reduce MFI profitability, potentially limiting their borrowing capacity. Existing priority sector loans before April 1, 2011, remain grandfathered until maturity.
What you must do
- Update internal policies to require quarterly CA certificates from MFIs confirming 85% qualifying assets, 75% income-generation loans, and pricing compliance.
- Review all MFI loan portfolios extended after April 1, 2011, to ensure they meet the new qualifying asset and pricing criteria.
- Train credit officers on the new borrower income limits (₹60,000 rural, ₹1.2 lakh urban), loan caps (₹35,000 first cycle, ₹50,000 subsequent), and repayment terms.
- Monitor MFI compliance with margin and interest caps (12% margin, 26% interest on reducing balance) and ensure no penalty for delayed payments.
Who it affects
All scheduled commercial banks lending to MFIs, Micro Finance Institutions (MFIs) seeking priority sector loans, Banks' priority sector lending compliance teams
What happens to MFI loans extended before April 1, 2011?
They continue to be classified as priority sector advances until maturity, even if they don't meet the new criteria.
What are the key pricing caps for MFI loans to qualify as priority sector?
MFIs must maintain a margin cap of 12% and an interest cap of 26% per annum on a reducing balance basis. Only processing fee (≤1%), interest, and actual insurance costs can be charged.
How do banks verify MFI compliance?
Banks must obtain a Chartered Accountant's certificate from the MFI at the end of each quarter, confirming the 85% qualifying assets threshold, 75% income-generation loan ratio, and adherence to pricing guidelines.