The microfinance industry (MFI) grew 10 percent year-on-year in FY22, with its overall gross loan portfolio touching Rs 2.8 lakh crore, according to a recent study. The Reserve Bank of India (RBI) also introduced a new regulatory framework for MFIs in March 2022.
In an exclusive interview with Moneycontrol, Jiji Mammen, Executive Director and CEO, Sa-Dhan, a self-regulatory organisation for the microfinance sector, spoke about the flexibility of the RBI rules and new framework that could be introduced to ensure maximum efficiency of the sector.
The number of loans disbursed has gone down due to the high level of rejections. Your views?
There is a slowdown that has happened because of two things: One is that the MFI institutions are still coming to terms with the new guidelines. So, some kind of tinkering of the system is required, and some kind of understanding by the field-level staff is required.
So, training is an important aspect of that. So, in the month of April, if you’d asked me what happened, it was almost nil. We didn’t have any kind of lending. In May we just started lending a bit. It is now slowly picking up.
Secondly, one more reason for the slowdown is because it’s a new phenomenon that needs to be understood properly. Here also the understanding of the field level person is very important. So, proper training is required.
Moreover, the RBI has put in Rs 3 lakh as the household income limit. So, there could be probably an assessment done because some of the assessments done the previous day, in the records available with the credit information bureaus, may not be very correct.
In fact, the RBI has given MFIs freedom — if there is an amendment to be made, they can do it, and they can make amendments. If the existing income shows that he is already having 3.5 lakh annual income, then automatically he gets rejected. But then, if the lender feels that the assessment was wrong, we have the freedom to make an amendment and give our reasoning for that.
Is there any plan to make changes in the current credit analysis framework, considering the new changes and customers facing confusion in getting loans? Or any plan to study and understand the reasons for rejections?
I think that is something that will take a little time to stabilise. So, one is that probably the income assessment data captured is still not proper. So, I feel that in some cases, the income shown in the records is going beyond the limit fixed by RBI.
Secondly, there is family indebtedness, because you’re taking the indebtedness of all the persons in the household, so that also could be one of the reasons.
So, our board had a meeting last week, where we decided that Sa-Dhan will do a quick study to understand this large level of rejection. So as early as possible, we will come out with the reasons. We will then discuss with the RBI and see whether any further improvement in the guidelines is required or any kind of changes are required.
How can MFIs meet the credit needs of lower-income households?
The new regulatory norms give a lot of freedom and flexibility. Earlier it was all more of a vanilla type of thing — the first cycle means 30,000, and the second cycle is 40,000. That kind of a prescription was there, and that is how the sector was behaving.
Now, you have a choice of even going beyond that. You don’t have to stick to that kind of vanilla lending. You can innovate on the product itself. So, suppose somebody is coming to you for the first time, but he or she has a history of borrowing from somewhere else and showing a good credit history, the product can be modified accordingly.
Making a proper assessment of the creditor is an important thing. And according to that, you have the freedom to lend the required amount. So, microfinance institutions should be tuned in to that kind of thing. Earlier it was much easier: somebody comes for the first time, you give a 30,000 loan and finish it off.
But now you have to really make an assessment, understand the repayment capacity of the person, of the family and also understand the existing liability credit. Then you can make a real assessment of how much more can be given, and how much credit appetite the person has. So, accordingly, you can fix the product differently.
Will Sa-Dhan be coming up with any sort of new framework like it introduced the credit analysis framework before?
We are looking at bringing out some framework for, what you call, the fraud exchange. Frauds have always happened in the sector because you are handling cash and you have a large army of people working in the field. So, there are elements that cause concern. So, Sa-Dhan, along with Equifax, is trying to bring out some kind of a framework as far as fraud management is concerned. Of course, it’s in the early stages.
What regulatory changes do you think the RBI will make?
One of the major problems is that the Rs 3 lakh limit is going to be a kind of barrier. We have seen that just because somebody has Rs 3.5 lakh in the records, or Rs 3.4 lakh or Rs 4 lakh, the person is not really above the microfinance level, because he is probably still finding it difficult to access credit. So, credit access will become an important thing. The RBI also, I’m sure, will be watching this.
If they feel that this is going to be an issue, probably the RBI will be open to work on that. As I said, we will be doing the study and we’ll understand what exactly is the problem. I feel that one is that the existing data capture may not have been properly done. The second is that in some cases because you’re taking the family income, it will cross the limit fixed by the RBI. In that case, we need to talk to the RBI and see if further improvement is possible.
Despite MFIs catering to women customers, there is a gender gap in the entrepreneur index. How can MFIs help reduce this gap?
Borrowing is done by the women of the household. But many times, the money is passed on to the husband and the enterprise is handled by him. But that is not everywhere. There are several cases where women themselves are handling activities and enterprises. For example, you must be aware of the Kudumbashree program in Kerala, where lakhs and lakhs of women are all engaged in some kind of economic activity.
Some money will also flow into the family and that will be used for the family requirements or the husband’s credit requirements. But then, I’m sure women are coming forward and things will be much better in the days to come.
With tighter monetary policy likely to affect lending, and the RBI issuing new norms, will loan defaults rise?When you’re trying to do some innovations and some improvement or alteration in the products, there could be a little risk in that. It can cause higher defaults in the system. That’s what I feel. In fact, earlier also, I had said probably 99% recovery may not be possible going forward. It could be somewhere close to that, but we can’t expect 100% because lending is after all a business of risk. When you’re lending to a person, there is risk there. And you have to face that risk.