Home >Industry >Banking >What do the proposed micro finance rules mean for borrowers?

The Reserve Bank of India’s (RBI) new microfinance regulatory framework proposes a level playing field between banks, NBFCs and microfinance institutions (MFIs), with the banking regulator suggesting harmonization of rules among lenders. Mint explores:

Why is there a need for a review?

The current regulatory framework is applicable only to non-banking financial company (NBFC)-MFIs, while other lenders, which comprise about 70% share in the MFI portfolio, are not subject to such regulatory conditions. This leads to small borrowers getting loans from several lenders, contributing to their over-indebtedness. The main objective of the consultative paper is to address concerns related to the over-indebtedness of microfinance borrowers and enable the market mechanism to lower the interest rates in the sector. RBI, thus, proposed a review of the regulatory framework.

What is the proposed framework?

RBI has removed the pricing caps on MFIs introduced in 2014 following the recommendations of the Y.H. Malegam committee formed by the central bank to study the sector. The existing guidelines prescribe either a margin cap of 10% over the cost of funds for NBFC-MFIs with loan portfolio exceeding 100 crore and a margin cap of 12% for the rest or 2.75 times the average base rate of the five-largest commercial banks, whichever is the lower. This will allow microlenders to price loans in line with an internal cost structure. The new framework also does away with the two-lender norm for NBFC-MFIs.

The big picture
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The big picture

What are microlenders expected to do?

Microlenders are expected to have a board approved policy for household income assessment. It should consider capping payment of interest and repayment of principal for outstanding loans at 50% of the household income. It should provide repayment flexibility and ensure that usurious interest rates are not charged.

How will this affect borrowers?

MFI borrowers will get greater access to loans. Freeing of price cap could have an impact on borrowers of small MFIs in remote areas as their cost of operation is high, resulting in higher interest rates initially, which will drop as business expands and competition picks up. Borrowers would be given a choice of periodicity of repayment based on their needs. There would also be no pre-payment penalties. Borrowers will have access to a simplified one-page disclosure format containing information on pricing of loans.

How will this impact banks and MFIs?

Industry experts believe the proposed changes will be positive for NBFC-MFIs and negative for banks as they remove caps on borrower limits and remove the ceiling on MFI pricing for them. Some analysts say income assessment at the household level could be challenging given the fragmented and unorganized customer base. HDFC Securities Ltd in a note said Bandhan Bank and Ujjivan Small Finance Bank would be the hardest hit, given the high ticket size of their loans.

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