RBI to Review ₹3 Lakh Household Income Cap for Microfinance Loans While Retaining Repayment Limit
The Reserve Bank of India (RBI) is set to examine the ₹3 lakh annual household income threshold governing microfinance lending, according to RBI Deputy Governor Shirish Chandra Murmu. The move comes amid growing calls from the microfinance industry to raise the qualification ceiling to account for inflation and evolving economic realities.
Addressing an industry gathering organised by the Microfinance Institutions Network (MFIN) in Mumbai, Murmu confirmed that the central bank would assess the need for a revision depending on sector requirements and broader industry developments. The existing ₹3 lakh uniform income threshold was introduced under the harmonised regulatory framework in 2022, when the central bank merged rural and urban borrower categories that previously held caps of ₹1.2 lakh and ₹2 lakh, respectively.
Industry Push for Inflation Adjustments
Microfinance self-regulatory organisations (SROs), including Sa-Dhan and MFIN, have been advocating for an upward adjustment in the qualification limit. Industry bodies have argued that income levels have grown over the past few years, with some pitching to raise the ceiling to ₹4.5 lakh to prevent the exclusion of borrowers who have crossed the ₹3 lakh limit due to nominal wage inflation but still require microcredit.
Sa-Dhan's data indicates that the overall microfinance portfolio contracted by 7.6% year-on-year to ₹3.26 trillion as of June 2026, even as the average ticket size for fresh disbursements increased by 15% to ₹62,962 and outstanding debt per borrower rose 8.7% to ₹49,825.
Regulatory Guardrails Remain Intact
While the RBI expressed openness to evaluating the income eligibility ceiling, Murmu explicitly ruled out any relaxation of borrower leverage protections. The central bank remains firm on preserving the Fixed Obligation to Income Ratio (FOIR) rule, which caps monthly loan repayment obligations at 50% of the household's monthly income.
The Deputy Governor outlined key supervisory concerns facing the sector:
- Over-Indebtedness and Ticket Sizes: Regulators have flagged increasing average loan sizes and multiple borrowings per household, urging institutions to uphold strict underwriting discipline.
- Northward Movement in Interest Rates: Despite the removal of interest rate caps in 2022, the RBI observed recent upward pressure on borrowing costs and stressed that competitive dynamics must result in fair and affordable rates rather than usurious charges.
- Vulnerability to External Shocks: Low-income borrowers remain disproportionately vulnerable to persistent geopolitical tensions, economic volatility, and climate events such as deficient rainfall.
- New-to-Credit Borrowers: The central bank cautioned against lenders concentrating heavily on existing customers while neglecting new-to-credit households.
Outlook for Lenders and Markets
The potential revision of the income limit offers listed microfinance lenders, small finance banks, and non-banking financial companies (NBFC-MFIs) room to widen their addressable market. However, the RBI's refusal to ease the 50% FOIR cap and its strict stance on credit reporting standards underscore that portfolio expansion cannot come at the expense of borrower repayment capacity or balance sheet health. Financial institutions will need to balance loan growth with rigorous credit assessment to prevent asset quality deterioration.
