Interview | New microfinance rules may shift focus to men but core remains women, says Muthoot Microfin CEO

Reserve Bank of India (RBI) on March 14 rolled out a fresh framework for microfinance to ensure banks and seven microfinance institutions (MFIs) follow an identical set of regulations.

The RBI defined microfinance as a collateral-free loan to a household having an annual income up to Rs 3 lakh.

In an interview to Moneycontrol, Muthoot Microfin CEO Sadaf Sayeed spoke about how the new framework has helped harmonise regulations.

He also spoke about the likely preliminary challenges some MFIs face in terms of implementing the new regulations and ways to overcome them.

Edited excerpts:

What are the primary challenges the microfinance sector may face in terms of implementing the new regulations?

In the long run, these regulations will be beneficial for the microfinance sector but there is a concern with respect to the application of these regulations. It is a major change. The capacity of the institution to adapt to the change and make the change within the IT system is a major challenge. Some institutions that are dependent on vendors, who are providing them with systems, will take time to adapt to the changes. This could be a challenge for smaller entity and new entity, as the whole economics of the business changes with the regulation. It may be time-consuming for them.

So what is the way ahead?

In terms of adaptability, new and small entities will require a lot of training and understanding and adoption of the process. It needs training both at the entity level and at the borrower level, to make them understand what we are doing. Now customers need to show the earnings of the other family members, like that of the spouse and children, so education and understanding are important.

Can the new regulations dilute the framework of MFI model and shift the focus from women borrowers?

In terms of lending, it could happen as many have apprehended that the new regulations may shift the focus of the customer base from women entrepreneurs belonging to joint liability group (JLG) in rural areas to individual male borrowers.

Will it affect the core business approach?

The core fundamentals of lending are unlikely to change. There is no longer a lead of JLG and lenders could lend to individuals also, which will also qualify as microfinance. It is also about the risk appetite of the institutions as lending to women under JLG has proven to be less risky. Now, it gives a little bit more encouragement to go a little bit more aggressively as the definition of microfinance has changed.

What are the challenges in implementation?

It is true that the RBI has put out more structured guidelines and the responsibilities lie with the lender as, ultimately, it is an unorganised segment. We have to deal with earnings of the borrowers that are not documented as many people don’t have income tax returns and other earning documents. Customers belong to the informal segment and they are earning money in cash. 

So assessment of income is the biggest thing. Responsible lending has to be a key. The microfinance sector is not very robust in terms of underwriting these informal incomes. The cash flow assessment needs to be in place. RBI has given some indications to calculate the income. It may appear a bit of a challenge for institutions that have not been doing it for a long time.

Has the regulation complicated the application process for the borrowers, especially from rural areas?

There could be a challenge in terms of documentation as they may not have all the documents. The burden of proof is not on the entity – in those cases, personal discussion and assessment often help and the assessment will be under the scrutiny of RBI. The customer is usually very adaptive.

Moreover, over the period of time, several benchmarks will be created and the credit bureau report will be robust to address any discrepancy.