Sa-Dhan, a Reserve Bank of India (RBI)-recognised self regulatory organisation (SRO) for microfinance institutions (MFIs), has introduced stricter guidelines for its 220-plus members, barring them from extending fresh loans to households with MFI exposure of beyond Rs 2 lakh.

“Households with microfinance exposure of beyond Rs 200,000 should not be given additional loans. The RBI-prescribed 50% FOIR (fixed obligation to income ratio) continues to apply,” the SRO said. Every MFI must mandatorily do a comprehensive credit bureau check at the household level for approving a small-ticket loan.

To avoid over-leveraging of already-stressed borrowers and reduce the chance of pushing them into debt traps, no loan should be given to any borrower whose account is recognised as a non-performing asset (NPA) with any lender for any loan amount of more than Rs 3,000.

The new guidelines were arrived at following the SRO’s meeting with managing directors and CEOs of its members, including Jana Small Finance Bank (SFB), ESAF SFB, Equitas SFB, Muthoot Microfin and Swantantra MFI.

MFIs should also follow transparent practices when pricing loans. Components of the rate of interest, including cost of fund, operational expenses, risk margin and interest margin, should be well defined and in compliance with guidelines issued occasionally. The rate of interest should be justifiable and approved by members of the MFI’s board, the SRO said.

The SRO’s new guidelines come within a week of RBI governor Shaktikanta Das’s speech at the FE Modern BFSI Summit on July 19, wherein the regulator warned of revisiting the revised regulatory framework for MFI loans issued in March 2022 if regulated entities continue with unfair lending practices.

“Critical issues related to conduct sometimes get sidestepped in the pursuit of short-term gains. For instance, charging of very high interest rates by certain regulated entities for microfinance loans is not in order,” Das said.

The regulator’s higher scrutiny on MFIs must be on account of overheating or increased delinquency rates in the segment, the chief of a private bank said.

Sa-Dhan said on Thursday considering the attrition rate among entry-level staff, and to prevent incidents of fraud, it is mandatory to do employee bureau checks for each staff member before hiring.

Any staff hired from the MFI industry should only be given three months to produce relieving letters and their services should be discontinued without those. At the same time, lending institutions should not withhold relieving letters of any staff member without justifiable reasons.