Uniform rule for MFIs may lead to competitive loan pricing

While the focus of the paper appeared on over-indebtedness and pricing gaps, there are some challenges to actual on-the-ground implementation of some recommendations, Edelweiss Research said.

The Reserve Bank of India’s proposed framework for harmonising the regulatory frameworks for various regulated lenders in the microfinance space is expected to help the market expand its size, and lead to more “responsible lending” and “market-driven” pricing of loans because of competitions.

It would, however, remain to be seen that how would removing the margin cap for NBFC-MFIs lead to a reduction in interest rates for the borrowers, if the suggestions are implemented, according to industry observers. There could be some challenges to actual on-the-ground implementation of some of the recommendations.

The suggested framework in the Consultative Document on Regulation of Microfinance has proposed to introduce a common 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 income, a board approved policy for household income assessment, alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs and introduction of a standard simplified fact sheet on pricing of microfinance loans for 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,” said Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank.

Credit rating agency Icra said the proposed regulations aimed at providing more flexibility to non-banking finance companies-microfinance institutions (NBFC-MFIs) in the pricing of loans; however, they would need to have board-approved 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 income in rural and urban/semi-urban areas may impact the overall credit growth in the microfinance industry. “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 said the RBI’s recommendations, if implemented, would ensure far better responsible 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 said.

While the focus of the paper appeared on over-indebtedness and pricing gaps, there are some challenges to actual on-the-ground implementation of some recommendations, Edelweiss Research said.