The income ceiling for for defining MFI loans, the proposal to free NBFC MFIs from the current cap on spread, etc, need a rethink
A decade after clamping down on the micro-finance industry, Reserve Bank of India (RBI) appears to be looking to ease the rules for the sector. While the move is well-intentioned, the central bank might want to take it a few steps at a time, rather than lift too many restrictions in one shot. It is, however, a good idea to try and harmonise the rules for micro-loans across various categories of lenders and not impose restrictions on non NBFC-MFIs. Indeed, RBI’s consultation paper moots an upgrade for NBFC-MFIs with almost all restrictions on them sought to be removed, putting them more or less at par with banks and NBFCs.
First, the paper proposes a common definition for MFI loans using household income as the criterion. These would essentially be non-collateral loans to households earning an annual income up to Rs 12,500 in rural areas and Rs 20,000 in urban and semi-urban areas. Given the ground realities and variance across towns and cities, the ceilings may need to be re-visited. Else, the limits would cap the average loan ticket size, especially for banks. Otherwise, they would need to sell this customer segment a different suite of products. The paper also suggests a common cap for a loan of at 50% of the household income; the idea is to control indebtedness of the borrower through an income-EMI ratio rather than absolute indebtedness. This would call for complete information on the borrower’s scheduled repayments across all other loans—MFI and non-MFI. Experts believe the current system where the number of loans and the outstanding amounts are easier to verify through bureaus works well. Also, the paper recommends that more than two lenders be allowed to lend to a borrower; this could be risky with multiple lenders approaching the same household but not sharing credit information. The cap of two lenders could be raised to three perhaps, but not more.
The proposal to free NBFC-MFIs from the current 10% cap on the spread also calls for caution. To be sure, this will allow them, especially smaller ones, to better price credit risk into lending rates. There is no doubt credit costs today could be much higher than the 1% assumed by the Malegam Committee in 2010. However, experts point out, the borrower could end up as the victim. That is because while the benefit of not capping the spread would aid smaller MFIs more, the spreads of the larger MFIs would expand as well. That then implies the borrowers could end up paying for this expansion. To be sure, lenders would be loath to let go of this freedom; they will argue that a cap slows credit flows, especially in tough times. However, we should not have an environment where organised lenders become the new moneylenders; that would defeat the purpose of keeping small households out of the clutches of the village moneylender. While competition can help rein in interest rates, removing the cap altogether may not work.
However, it is good RBI is calling for all lenders to make the same disclosures so that a price comparison is easier. The biggest challenge posed by the suggestions is going to be the assessment of household incomes, given how fragmented and unorganised the customer universe is. Collecting data would be both expensive and time-consuming. Moreover, it would be vulnerable to the subjective assessment of individual lenders and vary widely across time periods. There needs to be another way to do this, we possibly need two or three categories of incomes. It is welcome though that RBI wants to make lending to the MFI space easier.