CDS (II) 2022 General Knowledge · Question 7 of 120

Correct — C, The borrower should not refuse to offer a collateral. A microfinance loan is collateral-free by definition, so a borrower is entitled to refuse security and the statement inverts the rule. The Reserve Bank's Master Direction on the Regulatory Framework for Microfinance Loans, dated 14 March 2022, defines a microfinance loan as a collateral-free loan given to a household whose annual income does not exceed ₹3,00,000, and adds that 'the loan shall not be linked with a lien on the deposit account of the borrower'. That freedom from security is the whole point of the product: microfinance exists to reach households that have no land title or deposit to pledge, and it substitutes joint liability, small ticket sizes and frequent repayment for collateral.

• (a)The borrower should not have annual income beyond a limit. — Correct as stated. The 2022 framework fixes eligibility by household income, capping it at ₹3,00,000 a year, and defines the household as husband, wife and their unmarried children.
• (b)The borrower should not seek loan amount beyond a limit. — Also correct, though the form of the limit changed shortly before this exam. The older rules for microfinance institutions set a flat ceiling on the loan a borrower could take; the March 2022 Directions replaced it with a limit on repayment capacity, requiring that monthly repayment obligations on all the household's loans stay within half of monthly household income. Either way, how much a borrower may take is capped.
• (d)The borrower should not refuse to pay any rate of interest offered. — Awkwardly worded, and this is the softest of the three. The 2022 framework removed the interest-rate ceiling and instead requires every lender to run a board-approved pricing policy, to avoid usurious rates, and to display its minimum, maximum and average rates. Read as saying that pricing is the lender's to set within that discipline and that a borrower who takes the loan is bound by it, the statement stands. It is not, in any case, the defining feature that the collateral statement contradicts.

Microfinance is small-value lending to low-income households by banks, small finance banks, non-banking financial companies and NBFC-MFIs. Its distinguishing features are that the loan carries no collateral, that eligibility is set by household income rather than by assets, and that repayment is frequent and in small instalments. The Reserve Bank brought all lenders under one rulebook in March 2022, so that the same borrower protections apply whoever is lending.

The question is a NOT item, so read every option as a claim about what a microfinance borrower is bound by and look for the one that contradicts the product's design. Three of them describe caps and obligations that genuinely exist; one says the borrower may not refuse to give security, which is the opposite of what collateral-free means. It helps to hold the 2022 rules as a short list: income ceiling of ₹3,00,000, no collateral and no lien on deposits, repayment obligations within 50 per cent of monthly household income, no prepayment penalty, and penalties only on the overdue amount rather than on the whole loan. The interest-rate position is where the framework moved most — the old ceiling went, and disclosure plus supervisory scrutiny took its place, which is why option (d) reads so oddly.

• The Master Direction on the Regulatory Framework for Microfinance Loans is dated 14 March 2022 and applies to all regulated lenders, not only to NBFC-MFIs.
• A microfinance loan is a collateral-free loan to a household with annual household income of up to ₹3,00,000.
• The loan may not be linked to a lien on the borrower's deposit account.
• Monthly repayment obligations of a household across all its loans are capped at 50 per cent of monthly household income.
• There is no prepayment penalty on a microfinance loan, and delay penalties apply to the overdue amount rather than to the whole loan.

• Assuming a collateral-free loan means an unconditional loan; income and repayment-capacity limits still bind.
• Carrying the old flat loan-amount ceiling forward past March 2022, when it was replaced by the repayment-obligation test.
• Believing microfinance interest rates are capped by the Reserve Bank; they are governed by disclosure and supervisory review instead.

As a NOT-correct statement item on borrower obligations, as a set of statements on the 2022 framework's numerical limits, or as a definition question on what counts as a microfinance loan.

• practice — not a real PYQ

  Under the Reserve Bank of India's 2022 framework, a microfinance loan is defined as a collateral-free loan to a household with annual household income not exceeding

  • (a)₹1,00,000
  • (b)₹1,25,000
  • (c)₹2,00,000
  • (d)₹3,00,000

  Answer(d) ₹3,00,000 — the same ceiling applies to rural and urban households alike under the March 2022 Directions.

• practice — not a real PYQ

  Which one of the following is not permitted on a microfinance loan under the Reserve Bank's 2022 framework?

  • (a)Charging a prepayment penalty
  • (b)Lending through a joint liability group
  • (c)Setting the interest rate under a board-approved policy
  • (d)Recovering an overdue instalment

  Answer(a) Charging a prepayment penalty — the Directions state plainly that there shall be no pre-payment penalty on microfinance loans.