The microfinance industry is not likely to witness the pre-pandemic levels of collection efficiency of near 99 per cent levels as the entire landscape of microfinance lending in India has undergone transformation. Recovery levels are likely to settle around 96-99 per cent for the industry as a whole, said Jiji Mammen, ED and CEO, Sa-dhan.
The collection efficiency of MFIs, which had witnessed a significant decline in the early part of 2020 following Covid-induced lockdown and overall slowdown in economy, has been witnessing steady improvement over the last one to two years.
“Recovery rate has been improving. For all new lending done post the recent Omicron wave, the recovery rate is near 100 per cent. But the lending done during second wave has suffered and because of that overall recovery is down at 95-96 per cent. While it may go up a little [moving forward], it may not be possible to achieve the 99 per cent levels. It is likely to settle between 96 to 99 per cent,” Mammen told BusinessLine.
SROs to play development role
According to him, self-regulatory organisations (SRO) such as Sa-dhan have to undergo transformation and play more of a development role in the context of the recent changes in regulatory landscape.
The Reserve Bank of India had recently released its final guidelines for MFIs, which would apply to all entities, including banks, small finance banks and NBFCs engaged in the sector.
Under the revised guidelines, regulated entities (REs) lending to the microfinance segment will have to ensure that loans are collateral-free and not linked with a lien on the borrower’s deposit account, repayment obligations are capped, and interest rates are not usurious, and there is no pre-payment penalty.
The central bank has set a common household limit of ₹3 lakh for loans to qualify as microfinance, unlike the earlier definition that distinguished rural and urban households.
The maximum possible indebtedness per borrower has been increased to ₹2.4 lakh (from half of that earlier). It has also done away with the margin caps specifically applicable to NBFC-MFIs.
“The new regulatory framework is a landmark event and is a laudable step by the regulator. While it gives a lot of freedom to entities (in terms of fixing interest rates and designing products), it also calls for a lot of responsibility on behalf of lenders and their board,” he said.
Interest rates can now be decided based on board policy. Though freedom has been given to board to determine interest rates, SROs can keep an eye and help ensure that they are not usurious. This apart, Sa-dhan is also working on coming out with a framework on risk management tools.