By Udaya Kumar Hebbar
The microfinance sector got the attention that was due to it from RBI recently, with the proposed regulations for the sector. The suggested framework aims to protect customers by looking at all lending entities with the same lens and expanding control to create a level-playing field.
The Rs 2.59-trillion Indian microfinance sector, comprising 60 million unique customers, has come a long way since 2011, when a specific category of NBFC-MFI was created by RBI. Under this framework, a maximum of two such entities could serve a customer simultaneously. The customer base, earlier largely served by NBFC-MFIs, later saw many universal banks, small finance banks and other players joining the fray, though these are not directly under the purview of microfinance regulations.
The proposed norms aim to fix the anomalies by placing a 50% cap on the Fixed Obligation to Income Ratio (FOIR), which removes the limit on the number of lenders serving a customer and sets, instead, an overall indebtedness limit at the household level. RBI has given freedom to NBFC-MFIs to price loans adequately, duly approved by the board, by factoring in operating geography, customer behaviour, vintage etc.
Here are some suggestions to strengthen the framework:
- Revise income levels to enable rural capital formation: With the FOIR capped at 50%, the maximum annual household income of Rs 0.125 million in rural areas translates into a loan size of up to Rs 0.1 million for a tenure of two years. If the annual income limit in both rural and urban areas can be revised to Rs 0.25 million and Rs 0.4 million (from Rs 0.2 million), it will help capital creation in the hinterland. In FY21, Rs 1.73 trillion worth of loans were disbursed. This is the best form of capital supply to the bottom of pyramid.
- Lack of loan-cap may impair social collateral: The microfinance model, based on social collateral through joint liability of a group, rests on cohesion. While the proposed changes aim to limit overall indebtedness, institutions have the choice to decide on loan size and tenure. This may lead to a monopolistic structure wherein certain entities offer higher-ticket loans with varied tenure and still adhere to FOIR guidelines. This can lead to an imbalance in loan sizes within a group, distorting homogeneity, which would weaken the established social collateral model (the best security). It is advisable to fix a loan size (say, Rs 0.25 million) that will help retain the standardised cost-effective delivery model.
- Stronger governance through empowering SRO: Self-regulatory organisations (SROs) have played a vital role in promoting standardised practices. The 2019 Code for Responsible Lending (CRL) is an example of this, where the growing share of non-NBFC-MFI entities catering to microfinance customers led the Microfinance Institutions Network (MFIN) to fix a three-lender norm in a bid to curb over-indebtedness. Except a few players, most entities followed the CRL. It should be mandatory for all entities to follow prescribed practices.
- Allow use of Aadhaar for KYC/unique ID: All entities other than NBFCs are allowed to conduct Aadhaar-based e-KYC at the time of customer onboarding. Aadhaar is the only unique ID for tagging loan in the credit bureau for tiny loans. Extending the benefit of using Aadhaar for tagging and enquiring with the credit bureau will definitely help the industry.
- Clarity on qualifying assets: The current norm of at least 85% assets under the qualifying assets category is restrictive as well as unsafe, given large exposure to unsecured loans. As a result, some entities are using an alternative route—of creating a subsidiary for conducting secured lending business, through which they can scale up their secured book beyond 15% of assets and diversify income sources on a consolidated basis. RBI can allow MFIs to offer secured loans (beyond 15%), which will then be a part of the same balance sheet. This will help achieve a healthy mix of secured and unsecured books, strengthening the ability of institutions to weather external risks.
- Fix inconsistency in credit bureau reporting: The microfinance industry, along with self-help group (SHG) based lending, has been a great support to low-income households, but also has a certain degree of overlap amongst customers. Given that the individual-level data of SHGs are still in the process of being captured at the bureau level, it is crucial to expedite this process. The data submission timeline should be consistent for all stakeholders to enhance its richness; currently, only MFIs are guided by the regulator to submit it fortnightly. The new consultative document issued by the regulator will help widen the reach of microfinance business (currently at 32% penetration).
The author is MD & CEO, Credit Access Grameen Ltd. Views are personal