The Reserve Bank of India’s proposed framework for harmonising the regulatory frameworks for many regulated lenders in the microfinance space is anticipated to support the market place expand its size, and lead to more “responsible lending” and “market-driven” pricing of loans simply because of competitions.
It would, nevertheless, stay to be seen that how would removing the margin cap for NBFC-MFIs lead to a reduction in interest prices for the borrowers, if the recommendations are implemented, according to market observers. There could be some challenges to actual on-the-ground implementation of some of the suggestions.
The recommended framework in the Consultative Document on Regulation of Microfinance has proposed to introduce a widespread definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household earnings, a board authorized policy for household earnings assessment, alignment of pricing suggestions for NBFC-MFIs with suggestions for NBFCs and introduction of a common simplified reality sheet on pricing of microfinance loans for far better transparency.
“A uniform regulatory framework for the microfinance sector will ensure a level playing field among all regulated players. It is a very good move to cap the borrowers’ indebtedness at 50% of household income. Removal of margin cap for NBFC-MFIs and two lenders cap for these entities will help the market expand,” stated Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank.
Credit rating agency Icra stated the proposed regulations aimed at supplying more flexibility to non-banking finance providers-microfinance institutions (NBFC-MFIs) in the pricing of loans nevertheless, they would need to have to have board-authorized policies and enhanced disclosures.
“The removal of the interest rate ceilings is expected to make the players compete on the pricing of loans. We expects the market forces to work to benefit the borrowers in the long-term but because of the borrowers being less sensitive to interest rate, transmission of the same from lenders may take time,” Sachin Sachdeva, vice-president and sector head, Financial Sector Ratings, Icra, told FE.
Capping the borrowers’ indebtedness at 50% of household earnings in rural and urban/semi-urban places may possibly influence the general credit development in the microfinance market. “With a cap on the fixed obligation to income ratio at 50% and while meeting the household income criteria of Rs 1,25,000 and Rs 2,00,000 for rural and urban/semi-urban areas, respectively, the maximum permissible indebtedness of rural microfinance borrowers could be lower than the current levels unless the tenor is extended (currently about 24 months), while the same could increase for urban/semi-urban areas. This may impact the overall credit growth in the industry,” Sachdeva added.
Talking to FE, Ujjivan Small Finance Bank MD & CEO Nitin Chugh stated the RBI’s suggestions, if implemented, would make sure far far better accountable lending in the microfinance space. “This will certainly be a good long-term benefit for both the borrowers and the industry players. It is unlikely that there could be a misuse of flexible pricing guidelines for NBFC-MFIs because pricing of loans would be market-driven on the back of competitions. Level playing field for market participants will ensure market size expansion,” Chugh stated.
While the focus of the paper appeared on more than-indebtedness and pricing gaps, there are some challenges to actual on-the-ground implementation of some suggestions, Edelweiss Research stated.