Sweeping changes brought in Microfinance sector by RBI.
A thread🧵
A thread🧵
1) Regulatory arbitrage between banks and NBFC-MFIs removed. Earlier for lending there was a cap of ~10% over NBFC MFIs cost of funding(e.g. If cost of fund for an MFI was 13%, they could charge a maximum of 23% to the end borrower).However, banks had no such cap.
This cap for NBFC MFIs has been done away with. This will increase profitability of the NBFC MFIs.
Lot of small entities operating in remote geographies were finding it difficult to sustain due to this cap, removal of cap will help them a lot.
Lot of small entities operating in remote geographies were finding it difficult to sustain due to this cap, removal of cap will help them a lot.
2)Cap introduced on overall leverage that microfinance borrowers can take - Monthly loan repayments capped to maximum of 50 per cent of the monthly household income.
This again is a very good step – lot of overleveraging was happening in various parts of the country (especially North East India). This will help in curbing such malpractices.
3)NBFC MFIs earlier had to maintain 85% of their balance sheet as micro finance loans. This threshold has been brought down to 75%. This will allow them to diversify balance sheet to other asset classes like property loans, vehicle loans, gold loans etc.
4)NBFCs other than NBFC-MFIs can now extend microfinance loans upto 25% of their total balance sheet.
5) Definition of microfinance borrowers now includes households with annual income up to 3 Lakhs. Earlier the threshold was at 2 Lakhs. This will enlarge the pool of borrowers which will be eligible for such loans.
6) Guidelines on how recovery teams should behave with end borrowers - no harsh language, no calling before 9 am or after 6 pm, no misrepresentation of consequences of default, etc.
7)Providing a loan card to the end borrower disclosing all the charges, pricing of the loan, terms and conditions, acknowledgement of all payments recorded till date, etc in vernacular language. This will help in transparency and prevent mis-selling.
Industry feedback is positive on these changes. Also visible in stock price of listed entities like Credit Access which is up by 15%
Revised directions can be accessed at:
rbidocs.rbi.org.in
rbidocs.rbi.org.in
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