Money & Banking

Code for Responsible Lending plans additional parameters for tighter risk management

Shobha Roy Kolkata | Updated on August 03, 2020 Published on August 03, 2020

The microfinance sector may see fall in collections once the moratorium facility comes to an end

The Code for Responsible Lending (CRL), a self-regulatory mechanism put in place by the Microfinance Institutions Network (MFIN) and Sa-Dhan along with FIDC (Finance Industry Development Council), is set to introduce additional parameters for tighter risk management.

According to Manoj Kumar Nambiar, Chairperson, MFIN, the code, which currently has four broad parameters, will add two more by the third or fourth quarter of this fiscal.

Credit bureau report

As many as 110 entities have signed the voluntary code so far, which stipulates that not more than three lenders can have exposure to a particular client and their combined exposure should not be more than ₹1.25-lakh (or in some States such as Assam, where the penetration level is high and there is a perception of stress it could be even lower at ₹1 lakh). It also mandates that no lending can happen without a latest credit bureau report and finally no credit can be extended to a defaulter.

“After the initial four parameters we are now adding to that. We have already discussed it in the CRL Steering Committee meeting last week about adding two more parameters this year, which includes looking at a comprehensive credit bureau report so that we do not just rely on microfinance data while lending, but will also take banking bureau data to know what other loans the customer has taken. Second is the creation of an employee database to identify and keep at bay any fraudulent employee,” Nambiar told BusinessLine.

The move (to introduce more parameters) is particularly significant as the sector might face a spurt in delinquencies affecting its collections post September once the moratorium facility extended by the RBIcomes to an end on August 31. The central bank had extended a six-month moratorium on loan EMIs starting from March 1to provide some relief against the Covid-19-induced financial crisis.

“We will keep adding (more parameters) wherever we see a gap so as to make it tighter,” he said.

It is to be noted that the sector had, in the past, faced severe issues as customers sometimes were over leveraged leading to defaults. CRL was therefore brought in to ensure that customers are not over indebted.

Call for greater participation

However, for the code to be able to achieve the desired result, it is important for all players, including NBFC-MFIs, small finance banks commercial banks and others, to sign up and start sharing information.

According to Nambiar, as many as eight-to-nine entities, among which a couple of them are fairly large, have not yet become a part of CRL. The total microfinance portfolio in India is estimated to be close to ₹2.4-lakh crore and the NBFC-MFIs account for around one-third of the total pie.

“It (the list) is not complete there are some notable names who have not signed. Of the 8 to 9 (who have not yet signed), some are going through the internal approval processes to sign, but there are one or two who have differences and do not want to be scrutinised by anybody other than RBI,” he said.

Nearly 72 to 73 per cent of total microfinance portfolio is covered by CRL, the gap is primarily on account of the 8 or 9 players who are left out.

A compliance report is generated every quarter to check the level of adherence on the four conditions and a score is made available.

“This is how we hope to build credibility and ensure that the ones who are not following the code are held responsible. So, it is almost like naming and shaming,” he pointed out.

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Published on August 03, 2020
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