India: Monetary Policy - RBI Eases Norms for Microfinance Lenders, Hikes Loan Li...

Oct 2019
India, October, 04 2019 - The Reserve Bank of India on Friday raised income limits to be eligible for loans as the banking regulator wants more borrowers to have access to microfinance credit.

The household income limit for rural borrowers has been raised to Rs 1.25 lakh per annum from Rs 1 lakh earlier, RBI said in a statement on developmental and regulatory policies uploaded on its website. For semi-urban and urban households, the limit has been raised to Rs 2 lakh from Rs 1.6 lakh earlier.

RBI also allowed microfinance lenders to extend maximum credit worth Rs 1.25 lakh to eligible borrowers from Rs 1 lakh earlier. The new limits will apply to non-banking finance company-microfinance institutions.

That’s expected to improve the flow of credit to the economically weaker sections of the society. The increase in household income limit will also allow banks to classify more loans as "microfinance" on their books, allowing more liquidity being made available to NBFC-MFIs. Typically, banks purchase microfinance loans from smaller lenders to ensure that their priority sector loan requirement is met.

As of June, there were 84 entities in the NBFC-MFI segment where the outstanding loan book stood at nearly Rs 57,000 crore, according to data collated by Equifax. Among banks, the total microfinance loan book stood at more than Rs 78,000 crore.

"This is a good move reflecting the change in household income since 2015 and allows clients to avail of a higher loan amount from the RBI regulated formal financial institutions," Manoj Nambiar, chairman at MicroFinance Institutions Network, told BloombergQuint.

This change will also be a win-win for lenders and borrowers as it will provide more room to individual NBFC-MFIs to lend and allow more households access credit, Nambiar said. "The microfinance lenders will use this increased limit to continue to lend responsibly to over 50 million borrowers and contribute to financial inclusion."

The central bank had last revised the household income and loan limit in 2015. The current revision limit, it said in the statement, is being made after taking "into consideration the important role played by MFIs in delivering credit to those in the bottom of the economic pyramid, and to enable them to play their assigned role in a growing economy". The RBI will issue detailed guidelines soon.

The microfinance industry has faced stringent norms after a crisis in the sector in 2010. At the time, microfinance lenders concentrated in Andhra Pradesh had seen severe deterioration in their business as over-lending to smaller borrowers led to a state-wide problem. RBI had set up a committee under YH Malegam to study the segment and recommend appropriate norms.

The recommendations of the committee were then implemented in 2011 to ensure that another microfinance crisis doesn’t take place.

Source : BloombergQuint

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