Shirish Chandra Murmu, Deputy Governor of the Reserve Bank of India (RBI), stated on Friday that the central bank will consider changing the annual income threshold of 3 lakh rupees for clients of microfinance institutions. This statement was made in response to industry demands to raise this limit.
During an event organized by the Microfinance Institutions Network (MFIN) in Mumbai, Murmu noted that the decision to review the threshold would depend on an assessment of the necessity of such changes and the current situation in the industry.
He also urged industry representatives to strengthen household income assessment and reporting processes to maintain trust and prevent the misuse of any changes in regulatory thresholds.
The microfinance sector had also sought a revision of the 50 percent limit on the debt service-to-income ratio, or Fixed Obligation to Income Ratio (FOIR), proposing to exclude the principal component of some loans from this calculation. However, Murmu countered that such an exclusion would undermine the purpose of this limit, reduce its significance, and distort the picture of household indebtedness.
He emphasized that the goal of the 50 percent limit is to prevent excessive debt burden on borrowers while ensuring that a reasonable portion of the household income remains available for essential expenses and other life needs. Murmu added that 50 percent is already a generous threshold, considering the limited financial cushion of low-income families and their vulnerability to economic shocks.
Referencing a recent study, Murmu pointed out that, on average, a microfinance borrower spends 18.7 percent of their monthly income on loan repayment, while nearly two-thirds of the funds go towards consumption. Furthermore, periodic NABARD surveys on rural economic conditions and sentiment show that consumption and other expenditures account for approximately three-quarters of the household's monthly income, leaving the remainder for debt repayment and savings.
From a risk management perspective, Murmu stated that the regulatory FOIR should be viewed as a preventive maximum, not a target metric that every household must adhere to. He also drew attention to the steady growth in the average loan size in the microfinance sector: large loans are increasing significantly, while small loans are losing popularity.
While this may indicate growing confidence from lenders in borrowers with established credit histories, it also requires attention to the risks of over-indebtedness, including cases where borrowers take larger sums to repay old obligations, as well as the potential inflation of household income to improve loan approval chances. Moreover, he warned that excessive focus on existing borrowers could lead to new clients without credit history being excluded from the formal financial system.
