RBI to Review Income Limit for Microfinance Borrowers, Says Deputy Governor

Mumbai, November 15 (Daily Kiran) : The Reserve Bank of India (RBI) is set to reassess the income limit of ₹3 lakh for microfinance borrowers, as stated by Deputy Governor Shirish Chandra Murmu. This announcement comes in response to ongoing requests from the microfinance sector to increase the existing income cap.

Speaking at an event organized by the Microfinance Institutions Network (MFIN) in Mumbai, Murmu emphasized that any changes to the income threshold will be based on thorough evaluations and current developments within the industry.

He urged the sector to enhance the processes for assessing and reporting household income to maintain credibility and prevent potential misuse of any regulatory adjustments.

The microfinance industry has called for a review of the 50% limit on the fixed obligation-to-income ratio (FOIR), which determines the maximum monthly loan repayment relative to a family’s income. They propose excluding certain principal amounts from this calculation to provide families with more flexibility.

However, Murmu cautioned that excluding certain loans from the calculation could undermine the purpose of the limit. He stressed that the 50% cap aims to prevent borrowers from becoming over-leveraged while ensuring that families retain a fair portion of their income for essential living expenses.

He remarked, “It is important to recognize that the 50% limit is already quite generous, especially considering the limited financial security of low-income families who are highly vulnerable to economic shocks.”

Citing a recent study, Murmu noted that the average microfinance borrower allocates 18.7% of their monthly household income to debt repayment, with nearly two-thirds of their income going towards consumption.

Surveys conducted by NABARD reveal that around three-quarters of monthly household income is spent on consumption and other expenses, leaving only a small portion for debt repayment and savings.

From a risk management perspective, Murmu stated that the regulatory FOIR should be viewed as a maximum limit rather than a target that every family must strive to meet.

He also highlighted the ongoing trend of increasing average loan amounts in microfinance, noting that larger loans are rising rapidly, while demand for smaller loans appears to be declining.