RBI Lowers Microloan Pricing Caps: Changing Microfinance Definition

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The industry says new standards to protect the interests of borrowers, deepen the scope of microcredit.

The Reserve Bank of India (RBI) on Monday released a revised framework for microfinance lending, ending regulated interest rates in the segment and harmonizing microcredit standards between banks and non-bank lenders.

The regulator also standardized the definition of microfinance loans, stating that all unsecured loans, regardless of their end use and how they are applied for, processed and disbursed, granted to households whose annual income does not exceed 3,000 rupees should be considered as microfinance loans. The latest framework is based on a consultation paper released by the RBI in June 2021.

Microfinance lenders will now be required to put in place a board-approved loan pricing policy that will cover, among other things, a well-documented interest rate model or an approach to arrive at the all-inclusive interest rate . The new framework stipulates that a household’s monthly loan obligations should not exceed 50% of its monthly income. Each lender will now be required to have a board-approved policy regarding the cash outflow limit for debt repayment as a share of monthly household income.

Chandra Shekhar Ghosh, MD and CEO of Bandhan Bank, said the new standards will help deepen microcredit penetration in India by encouraging competition. “The latest guidelines strongly reflect the maturity that the microcredit industry has reached in India; and this will help harmonize the regulatory framework for different types of lenders, encourage healthy competition and allow customers to make an informed choice about their credit needs,” he said.

Manoj Kumar Nambiar, MD, Arohan Financial Services, said the decision to apply the rule of a 50% fixed bond-to-income ratio evenly to all categories of borrowers will reduce the pressure on them and lead to lower arrears and provisions for industry. . NBFC-MFIs represent approximately 31% of the country’s outstanding microfinance portfolio. Many of them have long held banks responsible for over-lending to bottom-of-the-pyramid borrowers and therefore reducing their ability to repay all their lenders.

MFIs-NBFCs will now be allowed to have non-microfinance loans representing 25% of their portfolios, compared to 15% previously. This will allow them to diversify their loan portfolios, industry executives said. Udaya Kumar Hebbar, MD and CEO, CreditAccess Grameen, said, “Increasing the eligible asset limit to a maximum of 25% will allow institutions to achieve a more balanced loan portfolio, reduce the impact of cyclicality and volatility on the balance sheet and to strengthen the capacity of institutions to deal with any external risk.

Alok Misra, CEO and director of industry association MFIN, said that in addition to creating a level playing field, the framework will address issues of over-indebtedness and multiple lending which were major concerns for the sector. “The household income review is a very gradual move with far-reaching implications, as low-income and more needy households will now come within the scope of accessible credit, bringing us closer to our goal of financial inclusion,” he said. he declared.

Lenders will be prohibited from imposing prepayment penalties on microfinance loans. The penalty, if any, for late payment will be applied on the overdue amount and not on the total loan amount, the main directions said.

“The guidelines are groundbreaking and mark a paradigm shift in the way microfinance business is conducted,” Nambiar said, adding, “The credit harmonization guidelines among all microlenders – banks and NBFCs – are an important step Being allowed to apply preferential pricing will enable us to offer better prices to our best customers.” Nambiar expects the new measures to help the industry shake off the impact of the pandemic and triple its $2.45 trillion portfolio over the next four to five years.

The standards lay down precise indications for the collection of debts and impose on the lender the burden of complying with them, even with regard to outsourced activities. Collections are made in a designated place decided by mutual agreement by the borrower and the lender. However, the field staff is authorized to carry out collections at the place of residence or work of the borrower if the latter does not appear at the designated place on two or more successive occasions. The framework specifically prohibits the practice of harsh recovery, 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 stipulates that “non-profit” companies engaged in microfinance activities that have an asset size of Rs 100 crore and above must register as an MFI-NBFC and send applications for the same in three months from the date of the circular. K Paul Thomas, MD and CEO, ESAF Small Finance Bank, said, “Placing more than 100 crore non-profit businesses on a level playing field with other players will bridge regulatory gaps. With this ruling, the RBI has taken a holistic approach to regulating the sector, regardless of its legal status or mode of operation, he added. According to Kuldip Maity, MD and CEO, Village Financial Services (VFS), the common regulatory framework creates a level playing field and now borrowers and lenders will have options. It will also improve lending in the sector and protect the interests of borrowers. “The revision of household income is another important measure, which will allow MFIs to meet the needs of the most needy borrowers. We also welcome the decision to relax the criteria for eligible assets to 75%, compared to 85% previously. This will allow MFIs to diversify their portfolio,” added Maity.

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