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Microfinance institutions (MFIs) will not lend more than Rs 60,000 per customer and cap the number of lenders to three under Joint Liability Group model, as per its new voluntarily agreed upon code of conduct.
Microfinance Institutions Network (MFIN), the Self-Regulatory Organisation (SRO) or body for the microfinance industry in India, on Tuesday released Mutually Agreed Code of Conduct (MACC) which will be applicable on all entities lending in the microcredit space.
Ratna Vishwanathan, CEO, MFIN said, “Microfinance entities lend to a very vulnerable section of the society. Multiple sources now lending in this sector has opened up more micro-credit avenues for clients and ensured ease of credit access for low-income households. However, there is also a need to protect microfinance borrowers from over indebtedness and safeguard their interests."
If the loan to a specific customer exceeds Rs 60,000 or the loan takes the total debt of the borrower above Rs 60,000 then such a loan will be given as an individual loan without involving the JLG.
MFIs, which offer small loans to the poor and unbanked, are also seeking easier provisioning norms from the Reserve Bank of India as they struggle to recover loans in the aftermath of demonetisation.
Microfinance providers will also have to provide key information and terms of conditions to the client before lending which is in line with RBI’s Fair Practices Code (FPC) and include them in the contractual documents such as loan sanction letter and loan card.
The MACC is aimed at providing a uniform set of business conduct rules, which are sector specific and entity agnostic to ensure responsible lending and microfinance client protection.
The existing regulations of micro credit were only applicable to NBFC-MFIs. However, microfinance sector has witnessed increased lending by other regulated entities as well such as Small Finance Banks, Banks, NBFCs and non-profit microfinance institutions who lend directly or indirectly through business correspondents.
These entities constitute two-thirds of the microfinance loan portfolio but do not have a similar regulatory business conduct framework that are applicable to NBFC-MFIs, the MFIN chief said.
She added that these steps will not only address our immediate goal of client protection but will also benefit in the long term leading to a healthy growth of the industry with lesser NPAs (non-performing assets).
This initiative was initiated by MFIN who brought together all micro-credit providers that led to the adoption of uniform common code for market conduct in the provision of micro-credit.
The size of the microfinance industry stood at Rs 106,823 crore in Q1 FY18 basis the total outstanding loan portfolio.
At present, banks are the largest provider of micro-credit with a loan outstanding of Rs. 38,486 crore and 36 percent share in the micro credit business. This includes both direct lending as well as indirect lending through business correspondent partnerships.
NBFC-MFIs share stood at 31 percent with loan portfolio of Rs 32, 820 crores. Small Finance Banks have 27 percent share while NBFCs contribute 5 percent.
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