Microfinance self-regulator defers capping lenders per borrower to 1 April

The sector's SRO had in November introduced the new cap along with a few other guidelines around micro lending. It had made key changes, including reducing the number of lenders to a borrower to three from four earlier, and capping the maximum indebtedness of a borrower at ₹2 lakh, including both micro and unsecured retail loans. These guidelines were supposed to be effective from 1 January, 2025.

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However, MFIN has decided to extend more time to MFI players to implement the rule around capping the number of lenders, while other rules came into effect as scheduled from Wednesday.

"MFI players wanted to end the year on a good note and hence they felt that introducing the cap on lenders in the fourth quarter when credit growth is strong may not be a good idea," said the first of the two persons cited earlier, both of whom spoke on the condition of anonymity. "Customers are used to a certain level of credit and therefore putting a sudden cap could restrict this flow of credit. So, it is necessary to do it in a gradual way," he added.

An email sent to MFIN went unanswered.

Overleveraging still unaddressed

Experts said that while the SRO has put a cap of 3 lenders and ₹2 lakh of loan, it may not address the issue of overleveraging of borrowers if household income is significantly below ₹3 lakh or if the income is not properly assessed. Hence, there is a need to standardize or make the process of income assessment more robust with limited flexibility of revising income upwards by incoming new lenders, they added.

MFIN had first introduced tougher norms for MFIs in July last year, after the Reserve Bank of India (RBI) raised concerns regarding several MFI practices, including charging high interest rates, evergreening of loans and multiple lenders to a single borrower. Alarmed by how borrowers were taking loans from multiple lenders, the industry association decided to cap the number of MFI lenders to a borrower to 4 and the total microfinance loans to a client at ₹2 lakh.

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In October, the SRO issued further guidelines to improve underwriting of MFI loans by taking into account loans with missing equated monthly instalments (EMIs) in credit bureau reports.

The same month, the RBI had also barred four non-bank lenders - Navi Finserv, DMI Finance, Arohan Financial Services and Asirvad Micro Finance - from sanctioning and disbursing loans because of unfair practices.

The third set of guidelines, released in November, had other changes besides the reduction in the maximum number of lenders to a particular borrower.

MFIN had also requested its members to stop lending to delinquent customers who have overdue loans for more than 60 days with an outstanding amount in excess of ₹3,000.

Current restrictions

Currently, lenders are not permitted to lend to customers whose repayments are overdue for more than 90 days. If a loan is not serviced for 90 days, it is classified as non-performing. The MFIN also proposed to seed PAN (permanent account number) for 50% of the borrowers by March 2025, which is expected to strengthen the KYC (know your customer) process.

The SRO had clarified that other than processing fee and credit life insurance, no other charges can be deducted from the sanctioned loan amount.

"These guardrails are designed to promote sustainable lending practice and reduce risks of overleveraging by borrowers in the long-term. However, in the near term as the rejection rates go up, it may squeeze the liquidity of borrower and also adversely impact the growth and asset quality of the lenders in this segment," Anil Gupta, vice president of rating agency ICRA, said.

ICRA expects the rise in assets under management of NBFC-MFIs to decelerate sharply to 0-5% for FY25 from 29% in FY24, Gupta added.

Citi in its research report in November had also said that the new norms will adversely impact growth, as 7-8% of the total assets under management is exposed to borrowers from four lender associations. “The refinancing constraint during the deleveraging phase would increase the risk of the stress spilling over," the foreign bank had said in its report.

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However, MFIN CEO Alok Misra, in an interview to Mint in November, had ruled out any impact on MFI's performance or build-up of stress owing to these guidelines.

In its Financial Stability Report released last week, the RBI cautioned about the increased stress in the MFI sector, with delinquencies rising across all types of lenders and ticket sizes. The central bank had noted that the share of stressed assets increased during the first half of the year, with 31-180 days pastdue (dpd) rising to 4.3% in September from 2.15% in March last year.

The report also noted that impairment was higher among borrowers who had availed loans from multiple lenders and those with higher credit exposure. The report also mentioned that the share of borrowers availing loans from four or more lenders had increased to 5.8% from 3.6% in the three years through September. The quarterly average ticket size of microfinance loans disbursed during the second quarter ended September rose 43% year-on-year to ₹50,430.