The Reserve Bank of India (RBI) on Monday released a consultative document on uniform regulation for companies engaged in microfinance business, The central bank called for changes in the regulatory framework of microfinance institutions (MFI), including removal of prescribed ceiling on interest rates and instead rooting for board-approved policies to determine it.
“NBFC-MFIs, like any other non-banking financial company (NBFC), shall be guided by a board-approved policy and the fair practices code, whereby disclosure and transparency would be ensured. There would be no ceiling prescribed for the interest rate. However, while doing so they should ensure that usurious interest rates are not charged,” RBI said in its Consultative Document on Regulation of Microfinance.
The idea is to harmonize regulations across all categories of microlenders. Note that the banking regulator had announced earlier this year in February that there is a case for a framework that is uniformly applicable to all regulated lenders in the microfinance space. While the micro lending space has scheduled commercial banks, small finance banks and non-banking financial company (NBFC) Investment and Credit companies, the regulatory focus has largely been concentrated towards those registered as NBFC-MFIs.
The key proposals include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, a Board approved policy for household income assessment and no pre-payment penalty or requirement of collateral along with greater flexibility of repayment frequency for all microfinance loans
Also, the proposals include alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs, introduction of a standard simplified fact sheet on pricing of microfinance loans for better transparency, and display of minimum and maximum and average interest rates charged on microfinance loans on the websites of regulated entities, the RBI said.
RBI stated that the discussion paper intends to facilitate a review of the applicable regulatory framework for microfinance activities undertaken by all regulated entities. This is expected to address concerns related to the over-indebtedness of microfinance borrowers and to enable the market mechanism to bring the interest rates down. RBI has sought comments on the consultative paper by July 31, 2021
For the unversed, present regulations dictate the maximum interest rate microfinance institutions can charge. Currently, a microfinance institution is required to use the lower rate between these two rates as the ceiling. It should either be cost of funds plus a margin of 10 percentage points for NBFC-MFIs with loan portfolio exceeding Rs 100 crore and 12 percentage points for others or 2.75 times of the average base rate of the five largest commercial banks.
RBI believes that the interest rate ceiling for NBFC-MFIs has had an unintended consequence of creating a regulatory prescribed benchmark for other microlenders. For instance, lending rates of banks hover around this regulatory ceiling despite comparatively lower cost of funds which leads to borrowers being deprived of the benefits from enhanced competition as well as economy of scale even under falling interest rate regime, it said.
The new framework suggested a common definition of microfinance loans uniformly applicable to all regulated entities to ensure that the target borrowers are identified with an element of certainty, irrespective of the type of lenders. Secondly, a limit for maximum permissible level of indebtedness for microfinance borrowers shall be made applicable to all regulated entities has been proposed.
Thirdly, it proposes that the current stipulation that limits lending by not more than two NBFC-MFIs to the same borrower shall no longer be required. Other proposed changes include each regulated entity requiring having a board-approved policy for household income assessment, periodicity of repayments as per borrowers’ requirements and all-inclusive interest rates charged to the borrowers. That apart, there should be no pre-payment penalty. The consultative document has been released today for feedback from all stakeholders.
It is worth adding that, according to industry association Sa-Dhan, the gross loan portfolio (GLP) of India’s microfinance sector grew 17% year-on-year (YoY) to Rs 2.11 trillion in FY21. The average ticket size in the March quarter of FY21 was at Rs 43,434 for banks, Rs 41,306 for non-bank financiers; Rs 36,993 for small finance banks; Rs 35,223 for non-banking financial company (NBFC)-MFIs and Rs 39,637 for the entire industry.
