1 in 2 micro-loans rejected since April, thanks to new RBI microfinance framework

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  • The new from RBI microfinance had a major negative impact on new microfinance loans.
  • Previously, banks rejected three out of ten applications – or about 30-35% – of such microfinance applications.
  • A microcredit is defined as an unsecured loan given to a household with an annual income of up to ₹300,000.
  • Microfinance disbursement is expected to be subdued for the April-June quarter, although there may be a pick-up in June.

One in two small loan applications have been rejected since India’s central bank implemented revised guidelines for microfinance lending in April 2022, a latest report by ICICI Securities has revealed.

The brokerage firm noted that earlier banks used to reject three out of ten requests – or around 30-35% – of such requests. But the
revised guidelines under the “Regulatory Framework for Microfinance Lending Guidelines 2022” have made it even more difficult for clients to obtain small loans, leading to an increase in the rejection rate.

“Our channel checks suggest that, following the implementation of the revised guidelines on April 1, 2022, in accordance with the “Regulatory Framework for Microfinance Lending Guidance 2022”, microfinance loan refusal the rate has risen to over 50% from 30-35% before March 2022,” ICICI Securities said in a report released on June 9.

A microfinance loan is defined as an unsecured loan given to a household with an annual income of up to ₹300,000.

What led to such rejection of microcredit?

ICICI Securities – a subsidiary of ICICI Bank – attributed the moderate growth to two main factors of the revised guidelines.

First, the maximum loan per borrower was capped at a 50% “EMI to income ratio” with an annual household income of ₹300,000, which left many loan seekers out. Previously, household income was maintained at ₹200,000 in urban areas and ₹160,000 in rural areas.

Second, the lender must take into account all outstanding retail loans at the household level – not just at the borrower level of microfinance institutions – while arriving at the monthly EMI, which has lengthened the processing time. integration of customers. These provisions are applicable to all commercial banks, all cooperative banks and all non-banking financial companies (NBFCs).

“Our interaction with field staff and branch managers suggests that center schedules have increased to capture details of all household members versus only borrower level data earlier. The same is likely to have an impact on short-term productivity,” the report notes.

But it’s not all bad, June can be better

According to data shared by MFIN, the microfinance loan portfolio of all lenders increased by around 10% year-on-year to ₹2.56 lakh crore at the end of December 2021, from 2.33 lakh crore ₹ the previous year.

The ICICI Securities report also noted that gradually increasing economic activities and steadily improving collections led to strong microloan disbursements in the second half of fiscal 2022.

But the momentum has been derailed by new directions in microfinance lending.

Even though the microfinance disbursement rate will return to pre-Covid levels in June, this will not be enough to increase overall loan disbursement in the April-June quarter. As a result, microfinance disbursement is expected to be moderate this quarter.

“The new regulatory regime will create a level playing field for all incumbents and the risk-based pricing approach should enable players to absorb cyclical credit costs more effectively than before. Although, in our view, the impact of the revised regulations on SFBs and banks will range from neutral to positive, NBFC-MFIs stand to benefit the most,” concluded ICICI Securities.

The revised guidelines have also been welcomed by other microfinance companies like Microfinance Institutions Network (MFIN), Village Financial Services and Ba-Dhan for similar reasons.

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