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BW Businessworld

Regulation of Microfinance

Many including a section of RBI was not comfortable with the architecture of NBFC-MFI regulations for medley of reasons like

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RBI’s consultative document on ‘Regulation  of Microfinance’ dated June 14, 2021 seems to break ground by shifting from “Legal Structure based” regulations to “Activity based” regulations .

The extant  regulations apply  only to NBFC-MFIs holding  a mere 30% market share leaving Banks  and  SFBs  holding  the remaining 70%. 

Many  including a section of RBI was not  comfortable with  the architecture  of NBFC-MFI regulations  for medley of reasons like

  1. They are heavy touch regulating every single aspect of the lending business of  MFIs like Interest rate, Ticket size, Overall indebtedness etc. 
  2. Interest rate/Margin  cap is a discordant note in the  deregulated  interest rate  regime
  3.  Arguably   the extant NBFC-MFI regulations may be construed as   “ Class legislation” as only  one set of entities are regulated that too on trade  practices.   But RBI  with its  exemplary regulatory experience  linked the regulations to priority sector dispensation to  mitigate the class legislation criticism. 

As per Somasundaram DilliRaj , former President of Bharat Financial Inclusion (BFIL)  “ MFI  regulations  indeed served the intended purpose of reviving   the MFI sector post the  ‘erstwhile AP MFI crisis’ . RBI not only removed the cancerous cells  as  a Regulator but also nursed the healthy cells  as a Developer of the financial markets. RBI  always adds balance to the system” 

Objectives of the  proposed guidelines seem to be 

  1. Augment  flow of credit to  micro borrowers and mitigate the adverse economic impact of  CV-19 Wave -II
  2. A liberalized approach to unshackle restrains on pricing , tickets size etc
  3. Move to “ Activity based” regulation irrespective of the legal structure of the institution providing microfinance 

Following restrictions  are removed

  • Interest rate /Margin  cap
  • 2 NBFC-MFI lenders only
  • Numerical cap of Rs.1,25,000/ on the aggregate borrowing of MFI customers
  •  50 % Income Generation Loan requirement

Whilst the foregoing  offer a lot more flexibility to NBFC-MFIs and  allow them to access credit/ price their loan products at market determined  rates  , they need to wade through 2 risk areas

  1. Fact that interest rate is  regulated by RBI and subjected to a Cap  mitigated Political Risk. 
  2. With  “Activity based” regulation  and market related pricing , NBFC-MFIs have to enhance their competitive strength against Goliathan  players like Banks and SFBs with deep pockets.

Somasundaram DilliRaj , former President of BFIL  notes that “NBFC -MFIs should further leverage their ‘Credit Delivery Skills’ and exploit  options of ‘confluence’ like BC, Assignment, Securitisation and Colending with banks so that the amalgam of ‘Credit Delivery  Skills’ of NBFC-MFIs and  the ‘Funding Capability’ of Banks  can augment the flow of credit”

Margin cap had  a toxic side effect .  Reducing  operating cost below the margin cap of 10% was  the primary  driver of  profitability . Many NBFC-MFIs  played up the ticket size to gain  operating leverage . The original MFI borrowers who had  credit reequipment of Rs.10 K or below were driven back to the unorganized sector . That segment  is a Blue Ocean for NBFC -MFIs and they may go back  to deep rural pockets and Rs.10 K ticket size borrowers albeit at a higher client acquisition cost. 

 ‘Coopetition’ and ‘Back to the Basics’ seem to be the solutions  for NBFC-MFIs to retain their  raison d’etre ”  sums up  Somasundaram DilliRaj.

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