New MFI guidelines to provide a level playing field for NBFC-MFIs : IIFL Capital Services

17 Mar 2022 , 04:44 PM

Recently, Reserve Bank of India (RBI) released revised guidelines for the MFI segment.
Key features are:
–         Harmonization of guidelines across regulated entities
–         Risk-based pricing now and no spread cap from the RBI
–         Qualifying assets criteria revised to instalment-to-income and household income
–         More flexibility to NBFCs/MFIs, with higher share of MFI/Non-MFI lending permitted
Overall, we see these guidelines as positive for NBFC-MFIs. There would not be much change for banks/SFBs as pricing cap, qualifying assets criteria, etc. were not applicable for them. Assessing household income and all the loans outstanding for customers to calculate the instalment amount is likely to be a challenge and the industry will have to go through a learning curve, in our view.
Revision to qualifying assets criteria
Qualifying assets have been increased to Rs300,000 household income from Rs125,000/200,000 in rural and semi-urban/urban locations. This will expand the market size, especially for rural and semi-urban catering NBFC-MFIs. RBI has also clearly defined ‘household’ as husband, wife and unmarried children. Further, it has capped instalment-to-income ratio at 50%. Lenders will need to ensure all outstanding loans (MFI or otherwise) are included in calculating ‘Instalment’; Instalment includes principal and interest amount.
Risk-based pricing to be followed:
RBI gave flexibility to regulated entities, to decide on pricing of MFI loans versus earlier system of spread cap-based pricing for NBFC-MFIs. This is positive in the near-to-medium term for NBFC-MFIs (SFBs/banks are not covered under the pricing cap), considering the pricing power financiers enjoy in this segment. However, over a longer period, competitive intensity may take the pricing lower. Further, the RBI clearly stated: “Interest rates and other charges/fees on microfinance loans should not be usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank”.
Other important changes:
·         Qualifying assets to be classified as NBFC-MFIs relaxed to 75% from 85%
·         NBFCs can lend 25% of the total assets to MFI versus 10% earlier
·         No lien on deposits allowed anymore
 
Other salient features of the guidelines are:
–         Directions are effective from April 01, 2022
–         Entities should have board-approved policies to provide flexibility to the borrower for repayments
–         There shall be no pre-payment penalty on microfinance loans
–         Penalty, if any, for delayed payment shall be applied on the overdue amount and not on the entire loan amount
–         Any change in interest rate or any other charge shall be informed to the borrower well in advance and these changes shall be effective only prospectively
–         Recovery shall be made at a designated/central designated place decided mutually by the borrower and the regulated entity. However, field staff shall be allowed to make recovery at the place of residence or work of the borrower, if the borrower fails to appear at the designated/central designated place on two or more successive occasions.
– Practices which shall be deemed as harsh for recoveries are (i) Use of threatening or abusive language (ii) Persistently calling the borrower and/or calling the borrower before 9 a.m. and after 6 p.m. (iii) Harassing relatives, friends, or co-workers of the borrower (iv) Publishing the name of borrowers (v) Use or threat of use of violence or other similar means to harm the borrower or borrower’s family/assets/reputation (vi) Misleading the borrower about extent of the debt or the consequences of non-repayment.