Money & Banking

Micro-credit lenders in the process of developing credit assessment tool

Our Bureau Mumbai | Updated on September 03, 2020

HR Khan, former Deputy Governor, Reserve Bank of India

Aimed at ensuring that lenders extend credit suitable to customers’ needs

Lenders in the micro-credit space are developing a credit assessment tool which will support them to go beyond multiple/over lending limits and more systematically evaluate the low-income customer vis-a-vis cashflows, leverage and repayment history, including use of comprehensive credit information report (CCIR).

This is aimed at ensuring that lenders extend credit suitable to customers’ needs and help in improving their well-being.

Lenders (non-banking finance companies - microfinance institutions, small finance banks, banks, non-banking finance companies) ensure that low-income customers don’t take loans from more than three lenders or cross the indebtedness cap of ₹1 lakh so that they are not over-leveraged.

According to Harun R Khan, Chairman of the Steering Committee of the Code for Responsible Lending (CRL) in Micro-credit, micro-credit lenders are also progressively moving to daily submission of data to Credit Information Companies (CICs) as the credit bureau data is the foundation of lending decisions in micro-credit.

Khan observed that the Covid-19 pandemic has highlighted the existing issues of vulnerability of low-income customers and thrown a new set of challenges due to a very uncertain and dynamic macro situation.

“And the ‘fundamental’ norms of CRL are going to be even more critical as customer-protection becomes paramount while lenders support them in rebuilding their livelihoods. We all know that the low-income-households have very limited access to safety nets and non-credit financial products and they excessively rely on credit to manage their financial lives,” said Khan, who was Reserve Bank of India’s Deputy Governor from July 2011 to July 2016.

He emphasised that it is the dharma (duty) of the lenders to save the customers from the sins of over-indebtedness. “To put it another way, microfinance lenders have to be both responsive and responsible,” said Khan.

Pent-up demand

Khan observed that owing to a pause in the economic activities in this period of pandemic, there is a pent-up demand that microfinance industry could anticipate, and growth is quite natural in the coming months.

“However, lenders should remain true to fundamentals of responsible lending enshrined in CRL norms even as they rush to ramp up disbursements. Sound, proactive liquidity management is also very critical for navigating such Covid 19 crisis like situations,” he said.

Khan felt that in the medium to long term, as the micro-credit market develops, both in terms of demand and supply, CRL norms must evolve to address the emerging changes.

“For example, as ticket sizes increase, there is a need to include cash flows and monthly debt obligations, etc in the threshold, as many customers may face over-leveraging and stress at lower thresholds.

“There is also a need to factor the credit behaviour of the customer on retail-side as micro-credit customers increasingly take additional retail loans,” the former RBI Deputy Governor said.

Besides, rising frequent uncertainties of cash flows amongst low-income-households due to natural disaster and economic downturns would require new approaches, products, and processes to implement CRL in spirit, he added.

Published on September 03, 2020

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