Over-borrowing rampant as non-banks turn aggressive

With multiple financial institutions chasing the same set of borrowers in rural areas, signs of over-borrowing are now apparent in the micro finance sector. It appears 2030 per cent of applications received by micro finance institutions (MFIs) are getting rejected on this count.

Banks now account for a major 37 per cent of the MFI portfolio. The new small finance banks (SFBs) are another 22 per cent. The rest is accounted by NBFC-MFIs, NBFCs (non-bank financial institutions) and non-profit MFIs.

The present regulations governing over-indebtedness apply only to NBFC-MFIs and non-profit MFIs. According to the Reserve Bank (RBI), the total loan amount to a single borrower should not exceed ~60,000 in the first cycle and ~100,000 in subsequent cycles by not more than two micro finance lenders at a time. As part of self-regulation, the Microfinance Institutions Network (MFIN) had kept the overall lending bar at ~60,000, raised to ~80,000 this April in view of the high demand for loans.

“From the total of applications we get, 30-35 per cent do not get shortlisted as credit has reached saturation,” according to Sunil Prabhune, chief executive for rural finance at L&T Financial Services.

When most MFI regulations were framed between 2012 and 2015, NBFC-MFIs had about 70 per cent of the micro loan portfolio. That has changed over the years. Now, NBFCs other than NBFC-MFIs, SFBs and banks are not in the purview of RBI regulations governing MFIs and, hence, micro lending. This is one reason MFIs are losing their lending space to banks. “As the regulations governing micro lending do not apply to banks, this leaves scope for regulatory arbitrage. It is possible for a customer to borrow from two MFIs and banks,” said Alok Prasad, former chief executive at MFIN.

According to a report by rating agency CRIF High Mark in March, Tamil Nadu had the highest proportion (3 per cent) of borrowers associated with four or more lenders, as compared to Uttar Pradesh (1.05 per cent), and West Bengal (0.67 per cent). However, the compliance in year-on-year terms has deteriorated the most for Bengal, followed by Karnataka, Bihar and UP.

“Gradually, three lenders, whether NBFC-MFIs or banks, is becoming a norm in micro lending, as that has been accepted by MFIN. The RBI regulation is stricter, limiting to loans from two NBFCMFIs. More banks are active in this space, which could be the reason for multiple borrowing in some pockets,” said Parijat Garg, vice-president at CRIF High Mark.

According to data from MFIN, the proportion of Portfolio at Risk (loans that have at least one payment overdue for more than 180 days) was 2.83 per cent for the MFI sector as on end-March, against 0.23 per cent a year earlier. “In about 20 per cent of applications, we are now declining credit because they have already availed of loans from multiple borrowers,” said Ashwani Kumar, deputy chief financial officer, Utkarsh SFB. According to a report from Bharat Financial Inclusion, the rejection rate for micro finance products at a sectoral level had risen from 18 per cent in the final quarter of 2016-17 to 22 per cent in the same quarter of FY18. Also, 47 per cent of the rejection was on account of loans taken from more than two MFIs.