Microfinance providers to curb excess, multiple lending in the sector

To address multiple and over lending issues in the microfinance space, micro-credit providers, including microfinance institutions (MFIs), small finance banks (SFBs) and banks will voluntarily abide by a mutually agreed code of conduct (MACC), whereby they will not lend to a client who already has current loans from three micro-credit lenders.

According to MACC, which was released on Tuesday by Microfinance Institutions Network (MFIN), microfinance providers have to validate total indebtedness of a client from a credit bureau. Further, they have to ensure that a loan given under the Joint Liability Group (JLG) model is restricted to ₹60,000 per customer.

An JLG comprises up to10 individuals who come together for getting a bank loan on individual basis or through group mechanism against mutual guarantee. Generally, the members of an JLG engage in a similar type of economic activity in agriculture and allied sectors.

If loan to a specific customer exceeds ₹60,000 or the loan takes the total debt of the borrower above ₹60,000, then such a loan will be given as an individual loan without involving the JLG.

Signatories to MACC will also have to provide key information to the client before lending, which is in line with the RBI’s Fair Practices Code (FPC), and include them in the contractual documents such as loan sanction letter and loan card.

The entities will have to communicate all terms and conditions to the clients and take measures to ensure that they fully understand the products, process and terms of the contract.

Ratna Vishwanathan, CEO, MFIN, said, “Microfinance entities lend to a very vulnerable section of the society. Multiple sources now lending in this sector has opened up more micro-credit avenues for clients and ensured ease of credit access for low-income households.

“However, there is also a need to protect microfinance borrowers from over indebtedness and safeguard their interests. It is heartening to know that all the entities lending in this sector have come together and have decided to voluntarily adopt and implement this Code of Conduct.”

MFIN, which is a self-regulatory organisation (SRO) for the microfinance industry, in a statement, said hitherto regulations of micro credit were only applicable to NBFC-MFIs.

However, the microfinance sector has witnessed increased lending by other regulated entities as well such as SFBs, banks, NBFCs and non-profit microfinance institutions who lend directly/indirectly through business correspondents. Hence, MACC has been drawn up to include other microfinance providers as well.

MACC addresses the need for implementation of a suitable pricing regime, addressing multiple and over lending issues and ensuring an appropriate interface mechanism with the micro-credit providers.

The size of the microfinance industry stood at ₹106,823 crore in the first quarter of FY18 on the basis of total outstanding loan portfolio, according to the latest MFIN Micrometer report.

Banks were the largest providers of micro-credit with a loan outstanding of ₹38,486 crore and 36 per cent share in the micro-credit business. This includes both direct and indirect lending through business correspondent partnerships.

NBFC-MFIs’ share stood at 31 per cent with loan portfolio of ₹32,820 crore. Small finance banks have a 27 per cent share while NBFCs contribute 5 per cent.