The Reserve Bank of India (RBI) on Monday released a revised framework for microfinance loans, putting an end to regulated interest rates in the segment and harmonising micro-lending norms across banks and non-bank lenders.
The regulator also standardised the definition of microfinance loans, stating that all collateral-free loans, irrespective of end use and mode of application, processing and disbursal, provided to households with an annual income up to Rs 3 lakh shall be considered as microfinance loans. The latest framework is based on a consultation paper released by the RBI in June 2021.
Microfinance lenders shall now have to put in place a board-approved policy regarding pricing of loans which shall cover, among other things, a well-documented interest rate model or approach for arriving at the all-inclusive interest rate. The new framework states that the monthly loan obligations of a household shall not exceed 50% of their monthly household income. Each lender will now be required to have a board-approved policy regarding the limit on the outflows towards debt repayment as a share of monthly household income.
Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank, said the new norms will help deepen the penetration of micro credit in India by encouraging competition. “The latest guidelines are a strong reflection of the maturity that the microcredit industry has reached in India; and it will help harmonise the regulatory framework for different types of lenders, encourage healthy competition and enable customers to make an informed choice regarding their credit needs,” he said.
Manoj Kumar Nambiar, MD, Arohan Financial Services, said that the decision to apply the rule of a 50% fixed obligation to income ratio uniformly to all categories of borrowers will reduce the pressure on them, and lead to lower delinquencies and provisions for the industry. NBFC-MFIs account for about 31% of the outstanding microfinance portfolio in the country. Many of them have for long held banks responsible for lending excessively to bottom-of-the-pyramid borrowers and thereby, reducing their ability to repay all their lenders.
NBFC-MFIs will now be allowed to have non-microfinance loans account for 25% of their portfolios, against 15% earlier. This will enable them to diversify their loan portfolios, industry executives said. Udaya Kumar Hebbar, MD & CEO, CreditAccess Grameen, said, “Increasing the qualifying asset limit to a maximum of 25% will allow institutions to achieve a more balanced lending portfolio, reduce the cyclicity and volatility impact on the balance sheet, and strengthen the ability of institutions to weather any external risks.”
Alok Misra, CEO & director at industry association MFIN, said that besides creating a level-playing field, the framework will address issues of over-indebtedness and multiple lending which were major concerns for the sector. “Revision of household income is a very progressive move with far reaching implications as more needy, low-income households will now come into the purview of accessible credit, taking us closer to our financial inclusion goal,” he said.
Lenders will be barred from charging pre-payment penalties on microfinance loans. Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount, the master directions said.
“The guidelines are pathbreaking and mark a paradigm shift in the way the microfinance business is done,” Nambiar said, adding, “The credit harmonisation guidelines between all micro lenders – banks and NBFCs – is an important step. Being allowed to charge preferential rates will allow us to offer better pricing to our better customers.” Nambiar expects the new measures to help the industry shake off the impact of the pandemic and to treble its `2.45-trillion portfolio over the next four-five years.
The norms lay down specific pointers with regard to recovery of loans and place the onus of complying with them squarely on the lender, even with respect to outsourced activities. Recoveries shall be made at a designated place decided mutually by the borrower and the lender. However, field staff shall be allowed to make recoveries at the place of residence or work of the borrower if the borrower fails to appear at the designated place on two or more successive occasions. The framework specifically prohibits the harsh recovery practice, including the use of threatening or abusive language and calling the borrower before 9:00 a.m. and after 6:00 p.m.
The framework states that ‘not-for-profit’ companies engaged in microfinance activities that have an asset size of Rs 100 crore and above must register as NBFC-MFIs and send in applications for the same within three months from the date of the circular. K Paul Thomas, MD & CEO, ESAF Small Finance Bank said, “Bringing `100 crore-plus not-for-profit companies on par with other players will bridge the regulatory gaps.” With this move, the RBI has taken a holistic approach to regulate the sector irrespective of legal status or mode of operations, he added. According to Kuldip Maity, MD & CEO, Village Financial Services (VFS), the common regulatory framework creates a level-playing field and now both borrowers and lenders will have options. It will also improve lending in the sector as well as safeguard the interests of the borrowers. “Revision in the household income is another important move, which will allow MFIs to cater to more needy borrowers. We also welcome the move to relax the Qualifying Assets Criteria to 75% from 85% earlier. This will allow MFIs to diversify their portfolio,” Maity added.