Mumbai: Reserve Bank of India (RBI) on Tuesday said that it has raised the limits for lending by microfinance institutions (MFIs) and also widened the base of borrowers for such companies.
In its monetary policy announcement, the central bank stated that it has raised the total indebtedness of a borrower to Rs.1 lakh, doubling it from the previous limit of Rs.50,000. Thus MFIs will be able to lend to customers with more liabilities now.
Educational and medical expenses will not be included when looking at a borrower’s indebtedness, RBI clarified.
Similarly, RBI stated that MFIs can disburse loans to a borrower with a rural household annual income of Rs.100,000 as compared with the earlier limit of Rs.60,000. In case of customers in the urban or semi-urban regions, the annual income limit has been raised to Rs.160,000 from Rs.120,000 earlier.
In the first disbursement cycle of the loan, MFIs can give up to Rs.60,000 out of the total loan amount. This limit was fixed at Rs.35,000 earlier, RBI said. In subsequent cycles, the companies can now disburse up to Rs.100,000 as compared with Rs.50,000 earlier.
The apex bank stated that this decision was taken after “taking into consideration the improvement in the micro-finance institutions (MFI) sector and recommendations of the committee on comprehensive financial services for small businesses and low income household”.
RBI will be issuing detailed guidelines in this regard, shortly, it said in the monetary policy statement.
“The move by RBI to raise lending limits for MFIs is a very positive development. Much needed, but even greater loosening up is necessary. Previously, microfinance companies had to turn away many borrowers because they could not serve them fully under the limitations that the regulations had put. The industry is well poised to serve the wide spectrum of the ‘unfunded’ world, where credit demand ranges between Rs.50,000 to around Rs.20 lakh,” said Alok Prasad, chief executive officer, Microfinance Institutions Network (MFIN).
MFIN is a self-regulatory organisation which regulates the microfinance institutions in consultation with the RBI.
The “unfunded” world largely consists of micro entrepreneurs and small businesses that cannot access the formal banking system for their funding needs.
On Tuesday, shares of SKS Microfinance Ltd rose 8.6% to Rs 513.95 on BSE, while India’s benchmark Sensex rose 0.04% to close at 28,516.59 points.
Microfinance institutions went through a rough patch after a crisis unfolded in Andhra Pradesh in 2010, leading to large defaults. The crisis itself was a result of unregulated lending to smaller borrowers, with many companies often lending to the same borrower.
Gross non-performing assets of the microfinance industry had gone up to Rs.2,227.06 crore in 2011-12 from nearly Rs.35 crore in 2009-10, Mint had reported on 7 September 2012. The net profit of these companies fell from Rs.474.68 crore in 2009-10 to Rs.284.44 crore in 2010-11, while they incurred a loss of Rs.2,149.26 crore in 2011-12, the report had said.
Since then, however, RBI introduced new regulations governing the sector, limiting their lending capabilities significantly. Among other limitations, the RBI, in July 2014, had mandated that the margins earned by large micro-finance companies with loan portfolios of Rs.100 crore and above could not exceed 10%. The limit was set at 12% for other such companies.