Will the RBI's proposal to amend MFI regulations harmonize the industry?
TEJI MANDI
With an intent to harmonize the microfinance industr y, the central bank has proposed to introduce a new regulatory framework.
It would include all types of lenders i.e. banks, small finance banks and NBFCs.
RBI has not outlined any detail about the proposal yet. However, the industr y is expecting it to reduce the gap between the banks and NBFCs. And, offer a level playing field to all the players.
What is the industry expecting?
The MFIs (Microfinance institutions) are expecting the RBI to do away with the dual regulator y system currently prevailing in the industr y.
As per the present rule,
1) There is a borrowing cap for microfinance borrowers (Rs 1.25 lakh for rural and Rs 2.0 lakh for urban).
2) )Household indebtedness of borrowers is capped at Rs 1.25 lakh
3) Microfinance borrowers can not borrow from more than two NBFC-MFIs.
While these rules are applicable to MFIs, banks are currently out of its purview, giving them an undue advantage.
The banks also enjoy an edge over MFIs in terms of borrowing cost. Listed MFIs borrowing cost is around 9-10%.
The same for the banks with large microfinance units have average borrowing cost in 6-7% range.
Lending rates on the other hand are not flexible, leaving no room for MFIs to increase their margins.
Harmonized rules can help NBFC-MFIs to price loans with more flexibility.
The MFIs are particularly vulnerable to legislative risks like what is currently playing out in Assam.
MFIs are more exposed to the events like government policy changes and political dops like loan waivers.
In comparison, banks can absorb the impact efficiently given the diverse loan mix.
Closing comments:
Harmonizing efforts are also crucial given the growing importance of MFIs. They play an important role in financing the most vulnerable section of society. Currently, the microfinance industr y serves 5.71 crore borrowers, through 10.50 crore loan accounts with a total loan portfolio of Rs 2,31,778 crores at the end of September 2020.
Banks hold the largest share of the microfinance portfolio with 40.71% of total micro-credit.
NBFC-MFIs are the second-largest providers, accounting for 30.17% of the total industr y portfolio.
Small finance banks have 18.61% share. NBFCs account for another 9.52% and other MFIs account for 0.99% of the industr y.
Harmonizing efforts are also crucial given the growing importance of MFIs. The microfin industry serves 5.71 crore borrowers, through 10.50 crore loan accounts with a total loan portfolio of Rs 2,31,778 crores at the end of September 2020
TejiMandi (TM Investment Technologies Pvt.Ltd.) is a SEBI registered investment advisor. No information in this article should not be construed as investment advice. Please visit www.tejimandi.com to know more.