What a microfinance loan means
In RBI’s rules, a microfinance loan is a loan without collateral (nothing like gold or land is pledged as security) given to a household whose total income is up to ₹3,00,000 a year. The label depends on the borrower’s household income, not on who lends. A bank, a small finance bank or an NBFC (a finance company registered with RBI that is not a bank) can all give one.
These loans are often paid back weekly, fortnightly or monthly. Many come through a group of borrowers who meet at fixed times, but a microfinance loan can also be given to one person alone.
The household rules
RBI looks at the whole household, not only the person who signs. Three rules follow from that:
- The repayment cap. All the household’s loan payments together, microfinance and other loans, should stay within 50% of monthly household income. The lender has to check household income before it lends.
- No collateral. The lender can’t ask for property or valuables as security.
- No prepayment penalty. You can repay early without a charge.
On top of these, staff may not call a borrower who is behind on payments before 9 am or after 6 pm.
A worked example
Lata, 34, lives near Gaya. Her household earns about ₹18,000 a month, or ₹2,16,000 a year, so it falls under the microfinance rules. The family already pays ₹2,000 a month on another loan.
A lender offers her ₹30,000, repaid as ₹660 a week for 52 weeks. It takes a 1% processing fee plus GST before paying out.
| ₹ | |
|---|---|
| Loan amount | 30,000 |
| − Processing fee (1%) | 300 |
| − GST on the fee (18%) | 54 |
| = Cash in hand | 29,646 |
| Total repaid (₹660 × 52) | 34,320 |
| Cost of the loan | 4,674 |
The RBI way to turn weekly payments into a monthly figure is a year’s payments divided by 12. For Lata that is ₹2,860 a month. In a month with five weekly due dates she pays ₹3,300. The APR (the yearly cost with interest and fees together) works out to about 29.5%.
With both loans, the household pays ₹4,860 a month. That is 27% of its income, well inside the 50% cap of ₹9,000. It still leaves ₹13,140 for food, rent, school and medicines, and less in a weak month.
Fictional example. The rate and fee are illustrative, not an offer. Calculated by Paisavy with the same method as the offer comparison tool, rounded to the nearest rupee.
Where you see the term
You’ll meet it on the loan card or passbook from the lender, in the KFS (Key Facts Statement, the short sheet with the rate, fees and total repayable) and in the lender’s pricing notice. RBI asks these lenders to show their lowest, highest and average interest rates in their offices and on their websites.
What it is not
The 50% cap is an upper limit. It is not advice on how much debt is safe. A family whose income changes with the seasons may struggle long before it reaches half its income.
A microfinance loan is not always a group loan either. If it is a group loan, your contract decides whether you must pay for others. See JLG and our guide on group loans.
Insurance or a product sold with the loan should never be a condition of getting it.
What to check
- Write down every loan the household pays, including gold loans and money owed to shops or relatives.
- Ask for the total you will repay and the cash you will get in hand.
- Find the APR in the KFS and compare two offers in the comparison tool.
- Check the lender’s name on RBI’s lists. Our lender directory lists RBI-registered microfinance lenders A–Z, with no ranking.
If payments already feel too heavy, the Hard to pay page shows calm next steps.