Business EconomyPosted at: Nov 15 2026 6:53PM


RBI to review Rs 3 Lakh income limit for microfinance borrowers: Deputy Governor

New Delhi, Nov 15 (UNI) The Reserve Bank of India (RBI) is considering a review of the annual household income threshold of ₹3 lakh for microfinance borrowers, following demands from industry participants to revise the existing limit. RBI Deputy Governor Shirish Chandra Murmu said the central bank would examine the need for a change based on its assessment of the sector and developments within the industry.
Speaking at an event organised by the Microfinance Institutions Network (MFIN) in Mumbai, Murmu said the review would depend on the evolving requirements of the sector.
He also emphasised the need for microfinance lenders to strengthen their household income assessment and reporting mechanisms to ensure transparency and prevent potential misuse of any changes in regulatory limits.
"The microfinance industry has also been seeking changes to the existing 50 per cent cap on the fixed obligation-to-income ratio (FOIR), which restricts the share of a household's monthly income that can go towards loan repayments. Lenders have proposed excluding the principal component of certain loans while calculating the repayment-to-income ratio," he said.
However, Murmu cautioned against such a move, arguing that excluding specific loan components would undermine the purpose of the regulatory restriction and result in an inaccurate assessment of household indebtedness.
He said the 50 per cent ceiling was designed to prevent borrowers from taking on excessive debt while ensuring they retained sufficient income for essential consumption and other living expenses.
He further pointed out that the existing threshold was already relatively liberal, considering the limited financial buffers available to low-income households and their vulnerability to economic disruptions.
The regulatory cap, he said, should be viewed as a maximum permissible limit rather than a borrowing target for households.
Citing a recent study, the RBI Deputy Governor said, "microfinance borrowers spend an average of 18.7 per cent of their monthly household income on loan repayments, while nearly two-thirds of their income goes towards consumption.
"Surveys conducted periodically by NABARD on rural economic conditions and sentiments also indicate that consumption and other expenses account for around three-fourths of monthly household income, leaving the remainder for debt repayment and savings."
Murmu also flagged the rising average ticket size of microfinance loans, noting that larger loans were gaining traction while demand for smaller-ticket loans appeared to be weakening.
Although the trend could indicate greater lender confidence in borrowers with established credit histories, it also raises concerns about increasing household indebtedness.
He warned that borrowers could be taking larger loans to repay existing obligations, potentially creating a cycle of debt. There were also risks of household incomes being overstated to help borrowers qualify for higher loan amounts, he added.
The Deputy Governor further cautioned that lenders' growing preference for existing borrowers could leave new-to-credit households outside the formal financial system.
He stressed the importance of maintaining a balance between managing credit risks and ensuring that first-time borrowers continue to have access to institutional finance.
The RBI's proposed review of the household income threshold comes amid the industry's demand for greater flexibility in lending norms, even as the central bank remains focused on preventing over-indebtedness and maintaining financial discipline among low-income borrowers.
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