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RBI releases consultative paper for regulation of microfinance loans, proposes to abolish pricing cap for NBFC-MFIs

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RBI said that the key proposals in its consultative document are aimed at protecting microfinance borrowers from over-indebtedness.

Reserve Bank of India (RBI) on June 14 released a consultative paper for regulation of microfinance loans across all regulated entities for feedback from stakeholders.
The proposed framework has listed a slew of changes to existing norms for NBFC-MFIs and NBFCs, and aligning them across various entities. The regulator has invited comments, suggestions and feedback on the proposed regulation by July 31, 2021 from all stakeholders.
The regulator said that the new framework was aimed at protecting the microfinance borrowers from over-indebtedness as well as enabling competitive forces to bring down the interest rates by empowering the borrowers to make an informed decision.
Key Changes Proposed
Common definition of microfinance loans for all regulated entities: Microfinance loans would mean collateral-free loans to households with annual household income of Rs 1,25,000 and Rs 2,00,000 for rural and urban/semi urban areas, respectively. For this purpose, ‘household’ means a group of persons normally living together and taking food from a common kitchen.
Other instructions applicable to microfinance loans of all regulated entities: RBI has proposed that each regulated entity have a Board approved policy for (i) household income assessment (ii) capping the payment of interest and repayment of principal for all outstanding loan obligations of the household as a percentage of the household income, subject to a limit of maximum 50 per cent (iii) periodicity of repayments as per borrowers’ requirements (iv) all-inclusive interest rates charged to the borrowers.
RBI's existing rules for NBFC-MFIs say aggregate amount of loans, given for income generation should not be less than 50 per cent of the total loans given by the MFIs, and that loans should be repayable on weekly, fortnightly or monthly instalments at the choice of the borrower.
No pre-payment penalty, transparency of pricing: RBI has proposed that lenders levy no charge for any pre-payments. It has also proposed lenders disclose all pricing related information in a standard simplified fact-sheet, including the minimum, maximum and average interest rates charged on microfinance loans.
Criteria for exemption of ‘not for profit’ microfinance companies: Any entites a) Undertaking micro financing activities, provided the payment of interest and repayment of principal for all outstanding loans of the household at any point of time does not exceed 50 per cent of the household income; b) registered under Section 8 of the Companies Act, 2013; c) not accepting public deposits; and d) having asset size of less than Rs 100 crore are proposed to be exempted as “not for profit” entities.
Pricing of microfinance loans provided by NBFC-MFIs: The regulator has proposed aligning pricing guidelines for NBFC-MFIs with guidelines applicable to NBFCs.
Withdrawal of loan sub-limit guidelines presently applicable to NBFC-MFIs: RBI has also proposed to withdraw certain rules for NBFC-MFIs, including sub-limits on loan amount (Rs 75,000 in first cycle, exclusion of loans towards education and medical expenses from overall limit), tenure (minimum tenure of 24 months for loans above Rs 30,000) and purpose (minimum 50 per cent of loans for income generation activities).
Withdrawal of 2-lender limit for microfinance loans for NBFC-MFIs: It also proposes to withdraw the two-lender norm for lending by NBFC-MFIs.
Withdrawal of pricing cap for NBFC-MFIs: The Current pricing norms for NBFC-MFIs say the maximum interest charged can be the lower of (i) cost of funds plus a margin cap of 10% for MFIs with loan portfolio of Rs 100 crore or above and 12% for others; (ii) The average base rate of the five largest commercial banks by assets multiplied by 2.75. The consultative paper released today also proposes to withdraw all pricing related instructions applicable to NBFC-MFIs. The regulator intends to align pricing guidelines for NBFC-MFIs with guidelines for NBFCs.
Background
The microfinance sector first gained prominence in the 1990s, and its informality and flexibility helped it grow rapidly since. However, several flaws came to light during the Andhra Pradesh microfinance crisis of 2010. The crisis was a culmination of irrational exuberance of some MFIs who bypassed diligence to lend aggressively leading to over-indebtedness of small borrowers, and unethical recovery practices. RBI had then constituted the Malegam Committee to address some concerns in the MFI sector. But the these comprehensive rules developed since only apply to NBFC-MFIs, leaving out a large part of the regulated ecosystem, which has led to over-indebtedness and multiple lending issues.
Over the years, the share of NBFC-MFIs has grown to over 30 percent of the Rs 2.27 lakh crore microfinance loans outstanding, RBI data showed.
“The comprehensive regulatory framework is applicable only to NBFC-MFIs, whereas other lenders, which comprise of around 70 per cent share in the microfinance portfolio, are not subjected to similar regulatory conditions. As a result, small borrowers are increasingly able to get multiple loans from several lenders, contributing to their over-indebtedness which, then, can potentially get manifested into coercive recovery practices,” RBI said in the paper.
For instance, the regulatory ceiling on interest rate is applicable only to NBFC-MFIs. “There is a concern that the current guidelines, prescribing an interest rate ceiling for only NBFC-MFIs, are effectively acting as a regulatory benchmark for other lenders as well. Lending rates of banks also hover around this ceiling despite comparatively lower cost of funds,” RBI said.
Banks have the largest share in microfinance loans, followed by NBFC-MFIs, Small Finance Banks, NBFCs and Non-Profit MFIs, as per RBI data. While the 30 days plus delinquency rates are high for the industry at 4.48 percent, the 90 plus day delinquency rates stood at 0.63 percent.
Microfinance sector at a glance
Source: RBI Data
Lender CategoryNumber of LendersLoan Outstanding (In Rs Cr)Percentage Share in  Loans30+ days Delinquency 90+ days Delinquency
Banks15Rs 93,432 cr40.99%6.04%0.60%
NBFC-MFIs86Rs 70,196 cr30.80%4.21%1.25%
SFBs8Rs 42,689 cr18.73%2.79%0.26%
NBFCs55Rs 19,848 cr8.71%2.04%0.35%
Non-profit MFIs33Rs 1,777 cr0.78%1.38%0.55%
Total Industry Level197Rs 2,27, 942 cr100%4.48%0.63%