Rule shift sought as microfinance institutions told to eye housing, education loans

Mumbai: Rising aspirations among low-income borrowers are prompting microfinance institutions (MFIs) to seek a relaxation in outdated lending rules so that they can not only diversify their offerings, but also stay competitive in a changed economic scenario.

Microlenders are pitching for changes to rules, set by the Reserve Bank of India (RBI) around three years ago, at a time when the central bank is encouraging them to diversify and offer more structured products such as loans for higher education and small housing loans.

“RBI is encouraging microlenders to be more innovative in loan offerings such as offering more structured products such as loans to housing, higher education and animal husbandry,” said Samit Ghosh, president of the Microfinance Institutions Network (MFin), an industry lobby.

The central bank has conveyed this proposal at meetings with MFin, although there has been no official communication on it, said Ghosh.

RBI’s efforts come against the backdrop of a sharp decline in poverty levels and a perceived increase in the aspirational level of low-income earners, now seeking to build a better life for themselves and their families. Between 2004-05 and 2011-12, a net of 137 million people, or 15% of the population, lifted themselves out of poverty, the Planning Commission estimated last year, bringing down the national poverty rate to 22%.

MFIs, which source funds from commercial banks and offer small loans to low-income borrowers, typically at 24-36%, say RBI’s idea will be difficult to implement within the existing regulatory framework, which restricts not only the amount that can be loaned, but also the kind of lending.

Under the current norms, MFIs operating as non-banking financial companies (NBFCs) are not allowed to lend more than ₹ 50,000 to individuals. RBI only regulates those MFIs that operate as NBFCs.

“This is difficult to do in the existing framework of regulations since MFIs are currently permitted to give loans only up to ₹ 50,000 per customer and 85% of the loans should be mandatorily lent in compliance with the regulations,” said Ghosh.

Loans given for purposes such as higher education and housing require a higher amount than the upper limit of ₹ 50,000 permitted now. “Demand is much more for loans such as those for higher education and housing than what is currently permitted. The limit of 15% for (non-qualifying assets) should be hiked to at least 30%-40% (of total loan book),” said Ghosh.

RBI said in an email on Wednesday that “regulation is dynamic and if change is felt necessary those changes will be brought about”.

MFin is soon planning to approach RBI seeking relaxations of current norms, said Alok Prasad, chief executive officer of the industry lobby. The group is also seeking a level playing field with banks for lending to the so-called priority sector. Under existing norms, 40% of bank loans should be for agriculture, exports and to economically weaker sections, which are classified as priority sectors.

While banks get priority sector status for lending small loans to specific segments, MFIs aren’t given the same treatment, Ghosh said. MFIs complying with RBI regulations are eligible to receive loans from banks under priority sector lending rules, but not all loans given by microlenders qualify to enable them to avail money from commercial banks.

Changing scenario

Microlenders are also asking for a review of rules on income caps for borrowers. The annual income for borrowers from NBFC-MFIs cannot exceed ₹ 60,000 in rural areas and ₹ 1.2 lakh in urban centres, according to the current regulations.

Microlenders say these income caps have become meaningless because of higher inflation and a rise in income levels in recent years.

“There needs to be a change in the rules since even a maid servant earns more than what the regulations say. Hence, they are being disqualified as microfinance borrowers,” said Padmaja Reddy, managing director of Hyderabad-based Spandana Sphoorty Financial Ltd.

“We have made a request to RBI to revise the limits,” said Reddy.

The income limit should be raised to ₹ 1.2 lakh for rural areas and to ₹ 2 lakh for urban segments, according to Reddy. He also said even though some of the microfinance borrowers are willing to offer some guarantees, RBI rules don’t permit it.

The present set of rules for NBFC-MFIs came into existence in 2011 following the recommendations of a panel headed by chartered accountant Y.H. Malegam—set up to suggest a new framework for microlenders in the aftermath of a crisis in the industry in October 2010.

The crisis followed a controversial law enacted by the erstwhile state of Andhra Pradesh after suicides among rural borrowers, allegedly due to coercion by some MFIs to recover their loans.

The law severely restricted the operations of microlenders, preventing them from doing door-to door business, and made it mandatory for MFIs in the state to seek government approval for second loans to a borrower. The restrictions, along with statewide campaigns by some political parties asking borrowers not to repay loans, resulted in a sharp fall in the repayment rate at MFIs. This is turn led to commercial banks holding back from lending to MFIs, thus fuelling a crisis across the sector.

RBI then created a separate category of NBFC-MFIs, which it regulates. New regulations were also introduced stipulating that NBFC-MFIs must have a minimum of 85% of their total assets as qualifying assets—loans that comply with regulations of individual loan caps and annual income caps.

“Today, if a poor borrower wants to buy a buffalo, that will cost him or her more than ₹ 60,000. Don’t they qualify to be a microfinance borrower?” asked Reddy.

RBI said in an email response: “Under the current regulations, loans given for income generation should constitute at least 70% of the total loans of the MFI so that the remaining 30% can be for other purposes such as housing repairs, education, medical and other emergencies. This has been the demand of the industry and hence allowed.”

“A separate regulatory framework was put out for NBFC-MFI in recognition of the clientele they serve and certain benefits like their loans being categorized as PSL (priority sector lending), ECB (external commercial borrowing), etc., have been extended to them. Hence, it is important to comply with these regulation to continue enjoying these benefits. Apart from this, regulation is dynamic and if change is felt necessary those changes will be brought about,” RBI said.

But industry officials say that doesn’t help because the 85% of loans still needs to be under the qualifying assets category.