For years, Indian microlenders have fought for a level-playing field in the business. And, they may finally get that now vis-à-vis commercial banks with the Reserve Bank of India (RBI) planning uniform rules for various lenders operating in the microfinance business.
Announcing the monetary policy earlier in February, the central bank said there was a case for having a framework which was uniformly applicable to all regulated lenders in the microfinance space including scheduled commercial banks, small finance banks and NBFC-Investment and Credit Companies, rather than prescribing these guidelines for NBFC-MFIs alone.
Accordingly, the RBI will come out with a consultative document harmonising the regulatory frameworks for various regulated lenders in the microfinance space in March 2021, the RBI said.
What is the background?
The microfinance business, lending small loans to entrepreneurs and low-income groups, is carried out not only by traditional microfinance institutions (MFIs) but also by banks. In fact, banks have a bigger share. Post the 2010 Andhra Pradesh microfinance crisis, the RBI created a separate category of NBFC-MFIs and framed rules for these firms to operate.
These include caps on interest rates these companies can charge to their borrowers, number of lenders who can lend to the same borrower and amount of money that can be lent to a single borrower.
Bigger NBFCs were restricted to charging a margin of 10 percent above their cost of funds while the cap was 12 percent for small NBFCs. Not more than two lenders were allowed to lend to the same borrower and the amount that can be lent to a single borrower was restricted to Rs 1.25 lakh. The RBI also clearly defined the income limit for an MFI Borrower to Rs 1.2 to Rs 2lakh.
But this didn’t apply to banks
The problem was that these rules didn’t apply to banks doing the same business. Banks could still charge a higher rate of interest to their MFI customers. “There are banks which lend at 24 percent to MFI borrowers whereas NBFC-MFIs lend at a maximum 21-22 percent. This isn’t a level play,” said a microlending industry official who didn’t want to be named.
Similarly, the other rules pertaining to MFIs too didn’t apply to banks. Thus, banks could give a much bigger loan amount to an MFI borrower or could jointly lend to the same borrower. Such practices brought in disadvantages to traditional microlenders.
“The proposed regulations will bring in a level play for banks and NBFCs doing the same business,” said P Satish, executive director of Sa-Dhan, an industry lobby of microlenders. “The microfinance industry has been talking to the regulator for long on this issue. Finally, there seems to be a solution,” said Satish.
Microfinance Institutions Network, MFIN, another leading industry body of microlenders too welcomed the proposed RBI unified regulations for microlending business. “Considering the diversity of players in microfinance today, it is the need of the hour,” said Alok Misra, CEO and Director MFIN.
What happens now?
Once the uniform regulations kick in, banks will be forced to follow the same set of rules as the NBFC-MFIs which will mean that their MFI loan business could take some hit. Banks will be restricted to the margin cap rules, single borrower lending limit rules as other NBFC-MFIs, said industry experts.
This will have an impact on those banks which are more aggressive in microlending business such as Bandhan Bank, said experts. An email sent to Bandhan Bank seeking response remained unanswered till the time of filing this story. “It is likely that those banks like Bandhan, RBL Bank and IndusInd with core focus in the microfinance business will see some impact on their portfolio if the rules are aligned with that of NBFC-MFIs,” said Sidhharth Purohit, analyst at SMC Global Securities.
Banks dominate the microfinance business.
Banks will see impact on MFI business since they will have to comply with rules on lending limit and interest rate etc,"said Sanjay Agarwal, Head of BFSI and NBFC at CARE Ratings.
According to Sa-Dhan’s “Bharat Microfinance Report –2020”, of the total MFI portfolio, 32 percent is from NBFC-MFIs, whereas Banks and SFBs together contributed to 59 percent of the portfolio.
The year on year growth of the portfolio is 38 percent for NBFC-MFIs whereas the Banks’ growth is 24 percent and SFBs’ portfolio has grown 34 percent. NBFC-MFIs have grown loan accounts by 26 percent and average ticket size by 9 percent, the report said.
The industry clocked a loan portfolio outstanding of Rs 2,36,427 crore as on March 31, 2020. This is according to data collated from 252 lenders, including microfinance institutions, not-for-profit microfinance institutions, NBFCs, SFBs, and Banks, Sa-Dhan said in its report.
According to India Ratings and Research, the proposed harmonisation could also provide a level playing field to NBFC-MFIs, as some forms of players such as banks, NBFCs, trusts sometimes follow different standards compared to NBFC-MFIs and often are the beneficiaries of the asymmetry in the present form.
The Reserve Bank of India (RBI) had set up guidelines for NBFC-MFIs in 2014 post the Malegam Committee report and placed limits on loan ticket size, loan tenor, the income profile of borrowers (to be eligible for microfinance loans to be classified as priority sector lending), processing fees that can be charged, yields (or margin caps - cost of funds + 10 percent margin), code of conduct, inclusion of self-regulatory bodies and credit bureaus.
Subsequently, there were revisions to the borrower exposure limit. “However, these guidelines are not explicitly applicable for microfinance by non NBFC-MFIs and hence the other forms of entities operating in microfinance benefit disproportionately from this asymmetry,” the rating agency said.