MFIN proposes common code of conduct for banks and NBFCs in microlending

With multiple lenders chasing same set of borrowers in rural areas, signs of over-borrowing are now apparent in microfinance

Given the aggressive lending by banks and financial institutions in the microfinance space, MFIN (microfinance institution network), the representative body of MFIs, is planning to bring on board banks, NBFCs (non-banking finance companies) and SFBs (small finance banks) to enter an agreeable code of conduct, limiting the indebtedness of borrowers.

With multiple financial institutions chasing same set of borrowers in rural areas, signs of over-borrowing are now apparent in the microfinance sector. In fact, close to 20-30 per cent of applications received by micro lending institutions are now getting rejected on account of existing excess borrowing, according to some microfinance players.

“Close to 90 per cent of the microfinance space is crowded by four players — NBFC-MFIs, banks, SFBs and NBFCs. While RBI guidelines on lending limits are applicable to NBFC-MFIs, there are no such regulations for other players. Hence, there should be common regulations so that there is no regulatory arbitrage,”’ said Manoj Nambiar, governing board, MFIN working on MACC (minimum acceptable code of conduct) draft.

MFIN had also raised the issue with Reserve Bank of India, which had advised MFIN to formulate the code of conduct, as there is no provision to limit lending by banks, according to sources.

Banks account for 39 per cent of the MFI portfolio, while small finance banks (SFBs) control another 21 per cent. NBFC-MFI account for 32 per cent of the portfolio.

The present regulations governing over-indebtedness apply only to NBFCs-MFIs and not-for-profit MFIs. According to RBI regulations, the total loan amount to a single borrower should not exceed Rs 60,000 in the first cycle and Rs 100,000 in subsequent cycles, by not more than two microfinance lenders at a time.

However, as a part of self-regulation, the MFIN had kept the overall lending bar at Rs 60,000, which was raised to Rs 80,000 in April this year in view of high demand for loans.

When most MFI regulations were framed between 2012 and 2015, NBFC-MFIs used to command about 70 per cent of the microloan portfolio. However, over the years, the dynamics of the MFI industry has changed. Since NBFCs (other than NBFC-MFIs), SFBs and banks are not in the purview of RBI regulations governing MFIs, and hence microlending, MFIs are fast losing their lending space to these players.

According to an internal study by MFIN covering 100 districts, about 8-10 per cent of borrowers have loan outstandings more than Rs 80,000, with most indebtedness being in the eastern states.