India Ratings and Research (Ind-Ra) is of the opinion that key changes in the final regulations for Microfinance Institutions (MFIs) will bring the entire sector under regulatory coverage, unlike the one-third sector coverage previously .

Additionally, the ability of small and medium-sized MFI players to implement risk-based pricing would help build both scale and operating buffers, resulting in improved creditworthiness in the eyes of lenders. This is in accordance with agency policy Outlook for FY23: Microfinance where he stated that the viability of small and medium MFIs could improve after the implementation of the proposed harmonization guidelines.

The notification is also expected to improve the ability of Non-Banking Financial Companies (NBFC)-MFIs to penetrate new geographies as prices can now be differentiated and cover higher operating costs for the same.

RBI regulations for microfinance loans

The Reserve Bank of India (RBI) announced the “Main Direction – Reserve Bank of India (Regulatory Framework for Microfinance Lending) Directions, 2022”, on March 14, 2022 (effective from April 1, 2022).

Key changes to the final regulations include expanding the definition of regulated entities to include commercial banks, cooperative banks, central district/state cooperative banks, NBFC MFIs, housing finance companies ( HFC) NBFC, as well as the removal of price caps.

The RBI also expects non-profit companies (with assets under management exceeding INR 1 billion) involved in microfinance activities to apply for an NBFC-MFI license.

These guidelines remove regulated pricing caps and allow NBFC-MFIs to implement risk-based pricing based on the risk profile of clients (more driven by council pricing policies), although the RBI stands reserves the right to qualify usurious interest rates should it deem it so.

The new guidelines broaden the definition of microfinance borrowers (in terms of household income assessment) and reduce the qualifying asset criteria to 75%, from 85% of total assets previously. This could spur NBFC-MFIs’ investments in building capacity in other loan products an MFI client can switch to, Ind-Ra said.

Positive implications for the MFI sector

The implementation of the new regulations would have a positive effect on NBFC-MFIs, especially for medium and small businesses that were unable to substantially originate and whose viability was called into question a once the lending rate dropped to 21.5% due to price. caps, the rating agency said. Furthermore, only 30% of the microfinance industry was made up of MFIs-NBFCs where RBI guidelines were mandatory while the rest were voluntary (where banks, small financial banks, NBFCs were actors). more important).

There were differences in how the two-lender standards were followed by all regulated entities. Some considered banks to be among the two eligible lenders while others were of the view that this only applied to NBFC-MFIs.

There were also mixed opinions on whether existing standards included secure NBFCs (gold, two-wheelers, etc.). This has been completely removed to level the playing field. From the perspective of borrowers, this could lead to an increase in the cost of credit; Nevertheless, the demand and performance of this segment of borrowers is reasonably inelastic to the price range as it currently exists (19% to 25%), Ind-Ra said.

The regulator, by reducing the minimum requirement for microfinance loans in the total loan assets of NBFC-MFIs to 75% from 85% previously, wants to encourage portfolio diversification in order to improve the capacity to absorb shocks by event risk case. -positive term as companies can offer secured loans of up to 25% of assets under management to minimize overall credit risk. It could also provide adequate opportunities for NBFC MFIs to invest in capacity related to non-micro lending products, Ind-Ra added.

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Posted: Tuesday, March 15, 2022, 6:31 PM IST