India: Microfinance Sector Wants Banks, NBFCs to Come under Lending Code

Jun 2019
India, June, 05 2019 - These companies are seeking a level-playing field where all lenders in the segment come under a common code, namely the Code for Responsible Lending

The microfinance sector is pitching to bring on board banks and non-banking financial companies (NBFCs) under a voluntary common code of lending, proposed to be effective from July 1.

In view of the aggressive lending by banks and financial institutions in the microfinance space, these companies are seeking a level-playing field where all lenders in the segment come under a common code, namely the Code for Responsible Lending.

The present Reserve Bank of India (RBI) regulations governing over-indebtedness in microlending applies 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.

As on March 31, 2019, banks, small finance banks (SFBs) and NBFCs together accounted for nearly 62 per cent of the microlending portfolio, according to data from Microfinance Institutions Network (MFIN).

Banks alone accounted for nearly 33 per cent of the portfolio.

According to Manoj Nambiar, member of the governing board of MFIN, apart from MFIN and Sa-Dhan (another representative body of MFIs), the Finance Industry Development Council (FIDC), the representative body of NBFCs, has already indicated its willingness to advise its members to follow the code. Moreover, MFIN is also in talks with the Indian Banks’ Association (IBA) to be a part of the code, said Nambiar.

The four parameters which the code is seeking to mandate for all include restricting the number of lenders to a single borrower to three, putting a cap of Rs 1 lakh borrowing by a single borrower, not lending to borrowers whose account has turned non-performing asset (NPA) previously, and lending backed by latest credit bureau report.

According to Nambiar, those who enter the agreement will be tagged “responsible lenders.” Also, to make it more enforceable, it will ask signatories to pass board resolutions in their respective firms so as to follow the norms laid out by the code.

“MFIN will publish their names publicly, so as to create moral pressure on organisations that have not signed the agreement to come on board,” he said.

About 80 organisations, including 10 SFBs, nearly 55 MFI members, 10 banks and five NBFCs are likely to be a part of the common conduct, he said.

With multiple financial institutions chasing the same set of borrowers in rural areas, signs of over-borrowing are now apparent in the microfinance sector. In fact, close to 30-40 per cent of applications in areas, where microfinance penetration is high, are now getting rejected on account of existing excess borrowing, according to some microfinance players.

MFIN and Sa-Dhan had earlier raised the issue of over-borrowing with the RBI, which had advised MFIN to formulate the code of conduct, as there is no provision to limit lending by banks, according to sources.

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.



Research Analysis Tools

The fund indexes, institution benchmarks and other market information displayed here are all Symbiotics designed analysis tools, created in-house by our analysts and experts. Symbiotics has one of the oldest track records in microfinance investment analysis dating back to the late 1990s; its indexes and benchmarks have been regularly used as markers by investors, asset managers, financial institutions and practitioners. These, as well as several other research products, are available through the Research Account. Click on the link below to find out more.

Learn More