Micro Finance Institution (MFI) — Registration and Regulatory Framework
A Micro Finance Institution (MFI) is a type of Non-Banking Financial Company (NBFC) that provides small-value loans to low-income borrowers who lack access to formal banking channels. MFIs play a critical role in financial inclusion by serving the unbanked and underbanked population, particularly in rural and semi-urban India. The regulatory framework for MFIs underwent a complete overhaul with the RBI's Revised Regulatory Framework for Microfinance Loans (Master Direction dated 14 March 2022), which harmonised microfinance lending norms across all lender categories — banks, NBFCs, NBFC-MFIs, and small finance banks.
Definition of Microfinance Loan
Under the RBI's revised framework (effective 1 April 2022, updated through 2025 circulars), a microfinance loan is defined as a collateral-free loan given to a household with annual household income not exceeding Rs. 3,00,000. This income-based definition replaced the earlier qualifying asset criteria which focused on loan amount (Rs. 1.25 lakh) and rural/urban classification. The household income assessment must be based on documentary evidence and verified through a reasonable process. The definition applies uniformly to all lenders — not just NBFC-MFIs.
NBFC-MFI Classification
An NBFC-MFI is a non-deposit taking NBFC (registered under Section 45-IA of the RBI Act 1934) with not less than 85 per cent of its net assets in the nature of qualifying assets (microfinance loans as defined above). The remaining 15 per cent can include other permissible NBFC activities. If the qualifying asset ratio falls below 85 per cent, the NBFC-MFI must either restore compliance within a timeframe set by the RBI or re-register as a regular NBFC.
Registration Process
Step 1 — Incorporation: Incorporate a company under the Companies Act 2013. The MOA must include objects related to microfinance lending.
Step 2 — Minimum NOF: Ensure minimum Net Owned Fund of Rs. 5 crore (for NBFC-MFIs operating in the North-Eastern Region: Rs. 2 crore). This is lower than the standard NBFC requirement of Rs. 10 crore, reflecting the social nature of microfinance.
Step 3 — Apply to RBI: Submit application through COSMOS portal with business plan, promoter credentials, fair practices code, customer grievance mechanism, and projected financials.
Step 4 — RBI Assessment: RBI evaluates promoter track record, capital adequacy plan, risk management framework, and geographic coverage plan. Social performance metrics (outreach to underserved populations) are also considered.
Step 5 — CoR Issuance: Upon approval, the RBI issues Certificate of Registration as NBFC-MFI with conditions on lending practices, interest rates, and portfolio composition.
Key Lending Norms (Post-March 2022 Framework)
Borrower Assessment: Lenders must assess the household income of the borrower and ensure that the total loan repayment obligation (all lenders combined) does not exceed 50 per cent of the household income. This is a critical consumer protection norm — over-indebtedness was the primary cause of the 2010 Andhra Pradesh microfinance crisis that led to the Malegam Committee recommendations.
Interest Rate: The earlier interest rate cap of margin not exceeding 10-12 per cent over cost of funds has been removed. Under the revised framework, there is no specific interest rate cap — but the RBI mandates that pricing must be transparent, non-exploitative, and based on a board-approved policy. All-inclusive interest (including processing fees) must be communicated upfront. Penalty interest and penal charges are separately regulated by the RBI's circular on penal charges (August 2023).
Loan Amount: No upper limit on individual microfinance loan amount — the defining criterion is household income (Rs. 3 lakh annual). However, lenders must ensure the 50 per cent repayment obligation cap is not breached.
Security: Microfinance loans must be collateral-free. No lien on borrower's deposits. No guarantee from third parties (except self-help group guarantees).
Repayment: Flexible repayment options — weekly, fortnightly, or monthly. No prepayment penalty. Minimum moratorium period must be offered.
Prudential Norms
Capital Adequacy: NBFC-MFIs must maintain CRAR of 15 per cent with Tier-I capital not less than 7.5 per cent. NPA classification: 90 days overdue (aligned with banks). Provisioning: standard assets 1 per cent, substandard 10 per cent, doubtful 20-50 per cent, loss 100 per cent. Asset classification and provisioning norms have been harmonised with the Indian Accounting Standards (Ind AS) framework for larger NBFC-MFIs.
Compliance and Reporting
NBFC-MFIs must file quarterly returns with the RBI, submit to annual statutory audit, maintain proper books of account, comply with KYC/AML norms under PMLA 2002, display fair practices code at all offices, implement a customer grievance redressal mechanism with escalation to the RBI Ombudsman, and report to credit bureaus. The RBI conducts periodic inspections of NBFC-MFIs to verify compliance.
Latest Updates (2024-2026)
The RBI's October 2024 circular mandated enhanced disclosure of interest rates and fees by all microfinance lenders, including NBFC-MFIs. The circular on penal charges (effective 1 January 2024) prohibits levying penal interest — only reasonable penal charges can be applied for loan contract violations. The Scale-Based Regulation framework applies to NBFC-MFIs based on asset size. The Self-Regulatory Organisation (SRO) for microfinance — Microfinance Institutions Network (MFIN) and Sa-Dhan — continues to operate as industry bodies promoting responsible lending practices.
Disclaimer: This article is for informational purposes only and does not constitute legal or regulatory advice. Please consult a qualified professional for advice specific to your situation.