RBI Rejects Microfinance Industry Plea to Ease 50% FOIR Cap, Says Deputy Governor Shirish Chandra Murmu

The Reserve Bank of India (RBI) will not dilute its macroprudential safeguards for the microfinance sector. Speaking at an industry event organised by the Microfinance Institutions Network (MFIN) in Mumbai on November 13, 2026, RBI Deputy Governor Shirish Chandra Murmu indicated that the central bank is unlikely to provide any leeway on the 50% Fixed Obligation to Income Ratio (FOIR) rule governing microfinance borrowings.

The microfinance industry had formally approached the banking regulator requesting two key relaxations: an upward revision in the qualifying annual household income threshold from the current level of ₹3 lakh, and an accommodative approach to the FOIR limit. Specifically, industry players had proposed that the calculation should account only for the interest component on certain categories of loans while excluding principal repayments.

Regulatory Intent and Borrower Vulnerability

Rejecting the proposal to modify FOIR computations, Murmu clarified that the primary intent of the metric is to shield vulnerable households at the bottom of the economic pyramid from falling into debt traps while ensuring adequate disposable income remains available for essential living expenses.

"Excluding some loans from the calculation would defeat this purpose, tinker with the sanctity of the limit and understate household leverage," Murmu stated during his keynote address, titled The Customer at the Centre: Building a Responsible, Resilient and Sustainable Microfinance Sector. "Let us also remember that 50 per cent is already a liberal threshold, given the thin financial cushion of low-income households and their vulnerability to economic shocks."

Murmu highlighted empirical data showing that low-income households operate with very tight cash reserves. A recent study revealed that an average microfinance borrower allocates only 18.7% of monthly household income to debt servicing, whereas nearly two-thirds is directed toward consumption. Similarly, surveys conducted by the National Bank for Agriculture and Rural Development (NABARD) demonstrate that consumption and living overheads consistently absorb approximately three-fourths of rural household earnings, leaving a modest buffer for debt repayments and emergency savings.

In such an economic environment, the central bank noted that an accommodative stance on repayment obligations is uncalled for. Murmu cautioned risk managers that the 50% ceiling represents a regulatory ceiling rather than an operating benchmark that every borrower must be stretched to meet.

Review Mechanism for Income Threshold

While holding a firm line on debt servicing limits, Murmu indicated that parameters such as the ₹3 lakh annual household income cap remain subject to periodic review to stay aligned with ground economic realities.

The central bank has instituted the Advisory Group on Regulation (AGR) to channel ongoing industry feedback into formal reviews. The current regulatory architecture, introduced in March 2022, harmonised microfinance guidelines across all regulated lenders—including commercial banks, small finance banks (SFBs), and non-banking financial company-microfinance institutions (NBFC-MFIs)—while deregulating interest rate caps and shifting the underwriting emphasis to household repayment capacity.

Key Takeaways for Market Participants

The central bank's steadfast position on leverage limits carries significant implications for listed lenders and equity investors tracking India's financial sector:

• Asset Quality Prioritised Over Growth: The refusal to ease debt caps will prevent lenders from aggressively expanding ticket sizes or stacking loans onto existing borrowers, capping the risk of systemic delinquencies.
• Focus on New-to-Credit Borrowers: Murmu warned that over-indexing on existing borrowers risks excluding first-time borrowers from formal finance. Lenders will need to expand their geographic reach rather than deepening leverage on seasoned borrower pools.
• Scrutiny on Spreads and Pricing: The RBI reiterated that pricing models must remain defensible and transparent, urging boards to ensure interest rates and fees reflect operational costs and credit risk rather than exploitative markups.

With the microfinance sector emerging from a phase of cautious consolidation toward gradual recovery, the RBI's clear signal reinforces that sustainable credit delivery and customer protection will remain non-negotiable pillars of India's retail lending ecosystem.