Reserve Bank of India likely to tweak norms to reduce MFI risk

The Reserve Bank of India (RBI) may tweak the qualifying assets threshold for microfinance institutions (MFIs) to 75 per cent of their net assets, compared with the current level of 85 per cent of net assets.

The parameters for MFIs’ qualifying assets are exposure to households with annual income limits of Rs 1.25 lakh (rural) and Rs 2 lakh (urban), are collateral-free loans with no prepayment penalty, and flexibility of repayment periodicity. The loan amount limit is Rs 1.25 lakh (Rs 75,000 in the first cycle and exclusion of loans for meeting education and medical expenses from the loan limit), and a minimum tenure of 24 months for loans above Rs 30,000.

The lowering of the qualifying threshold will help reduce the concentration risk for MFIs, where a disproportionate amount of assets are in one unsecured business and help diversify their books. This will also help them lend higher amounts to mature clients with a proven track record.

Sources pointed out that it will also address another fault line: Some large MFIs aspire to become small finance banks (SFBs) — the licences for which are now on-tap. Therefore, it is better for MFIs that are SFB licence aspirants to spread their risks now than do so after getting one.

At another level, the proposed move will also align the qualifying threshold of MFIs with that of housing finance companies — at 75 per cent of net assets.

 total assets in the microfinance business — of MFIs, banks, and SFBs put together — now stands at Rs 2.4 trillion, and is seen at almost Rs 6 trillion in 2027, covering nearly 140 million low-income clients.

It is learnt that the RBI will “soon release its final guidelines”, based on the feedback received for its 'Consultative Document on Regulation of Microfinance', released in June last year.

A related move may see the inclusion of a sub-segment within the definition of microfinance for matured borrowers. This is for those with annual income between Rs 2 lakh and Rs 5 lakh and who wish to graduate to big-ticket loans to set up micro enterprises and access credit for affordable housing.

It is surmised that the extant criteria of a household income of Rs 1.25 lakh for rural and Rs 2 lakh for semi-urban and urban locations for identifying microfinance borrowers may be revisited as well.

The criterion was last revised three years back (through the circular dated November 8, 2019) and is seen as a static benchmark since it does not factor in inflation and leads to the exclusion of several needy households. Moreover, the income differentiation based on location gets blurred due to migration of members of rural households to urban areas.