Mumbai: The Reserve Bank of India (RBI) will likely relax some of the tough new regulatory requirements it has stipulated for microfinance institutions (MFIs) that operate as non-banking financial companies (NBFCs), offering a breather for the sector that has been in crisis since its biggest market, Andhra Pradesh, tightened rules on lending to the poor.
The central bank is expected to give more time to NBFC-MFIs to comply with regulations relating to loan tenure and minimum annual income cap set for borrowers, among other regulations, said people familiar with the matter.
The new rules were specified in December when RBI announced the creation of a new category of NBFCs among MFIs, setting loan parameters which the lenders had to meet with retrospective effect from 31 March 2011.
RBI is considering to ease the norms after MFIs expressed their inability to meet the requirements, said the people, who spoke on condition of anonymity because of the sensitive nature of the matter.
“The modified guidelines are expected in the next few weeks. RBI has taken feedback from the industry and is currently working on the modified rules,” one of the persons said.
Under the norms set for NBFC-MFIs, only those loans advanced by them to rural households with annual incomes not exceeding Rs 60,000 or urban and semi-urban household with incomes not exceeding Rs 1.2 lakh can be counted as so-called qualified assets. The tenure of such loans has to be a minimum two years if the loan amount is in excess of Rs 15,000.
Total indebtedness of a borrower cannot exceed Rs 50,000. RBI said not less than 85% of the total loans of MFIs should count as qualified assets.
Mint’s Dinesh Unnikrishnan says that the Reserve Bank of India is likely to relax guidelines for NBFC-MFIs, especially for Andhra Pradesh-based ones, by the end of June this year.
Failure to comply with the norms would deprive NBFC-MFIs of access to loans from commercial banks that they use to lend to low-income earners at higher interest rates of 24-36%.
Most MFIs, which typically extend one-year loans to borrowers whose annual income is often less than Rs 50,000, are unable to comply with the back-dated norms as they struggle to recover from the crisis that began when Andhra Pradesh in October 2010 tightened lending norms.
To qualify for registration as an NBFC-MFI, a microlender needs to produce a statutory auditor’s certificate indicating the loan pattern as on 31 March 2011, RBI had said.
According to the people cited above, the central bank is now likely to extend the date to 31 March 2012.
More importantly, RBI may also announce a significant relaxation of loan provisioning norms for MFIs that have exposure to Andhra Pradesh.
RBI has made it mandatory for MFIs to make 100% provisioning on loans that were overdue for 180 days or more. All Andhra Pradesh-based MFIs were required to set aside amounts equal to the full extent of the overdue loans in the southern state.
In March, the apex bank extended the deadline to comply with the higher provisioning norms by one year to 1 April 2013, but MFIs pleaded their inability to meet the requirement even after the extension, given the slump in loan recoveries in Andhra Pradesh.
The central bank is likely to offer a relaxation of this norm, too, the people said.
Microfinance industry officials said relaxation of the regulatory requirement is essential for MFIs to stay afloat. But determining the income levels of the customers—typically the unbanked poor—while defining the qualified assets will be a challenge, given that a majority of the borrowers don’t possess documentation of their income flows, they said.
“Any further relaxation from RBI will obviously be very helpful for the industry... MFIs were totally unprepared to migrate to the new regulatory standards on retrospective basis,” said Samit Ghosh, founder and managing director of Ujjivan Financial Services Pvt. Ltd.
“However, it is difficult to verify the income level of borrowers as they don’t have any documented income,” Ghosh said.
The size of India’s microlending sector halved to Rs 15,000 crore from Rs 30,000 crore in two years after Andhra Pradesh prevented MFIs from collecting money from borrowers on a weekly basis, barred them from approaching customers at their homes, and made it mandatory for MFIs to get government approval for advancing a second loan to an existing borrower.
Some analysts are sceptical about the ability of MFIs to get back to normal, even if RBI relaxes the requirements.
“Unless the ground-level situation changes and loan recovery improves, MFIs are unlikely to get back to business normalcy,” said Santosh Singh, an analyst at Espirito Santo Securities India Pvt. Ltd.