The self-regulatory organisation (SRO) will have to reworked and the Code for Responsible Lending will have to be revised to adapt to the recently revised guidelines by the Reserve Bank of India for the microfinance sector.

According to Vinay Singh, Head, Self Regulation and Compliance Officer, MFIN (Microfinance Institutions Network), the role of SROs such as MFIN is set to become more important, evolved, and diverse in the light of the recent guidelines.

As an organisation, MFIN’s primary membership was largely restricted to NBFC-MFIs since the guidelines for these entities were different from other players in the industry. But now, since the revised regulations put all players on a uniform platform, MFIN will have to look at supporting all players with the clear intention of customer protection and growth of the sector.

“We are looking to rework the Code for Responsible Lending, it is in the process of consultation,” Singh told BusinessLine on the sidelines of the 6th Eastern India Microfinance Summit 2022 organised by AMFI-WB here on Thursday.     

Revised guidelines

The central bank 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.

RBI 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 the NBFC-MFIs.

Code for Responsible Lending to be reviewed

The Code for Responsible Lending (CRL), a self-regulatory mechanism put in place by MFIN and Sa-Dhan along with FIDC (Finance Industry Development Council), will have to be reviewed and discussions have been initiated, said P Satish, ED, Sa-Dhan.

The voluntary code, which stipulated that not more than three lenders can have exposure to a particular client and their combined exposure should not be more than Rs 1.25-lakh, would have to be suitably reviewed and reworked in the light of recent changes.

“Following the new regulations there is lot of handholding and support that is required from SROs by MFIs. We need to revise industry code of conduct and Sa-Dhan and MFIN are working on that,” he said.

Most MFIs have been busy adhering to the new guidelines, which began on April 1. It would take one full quarter for organisations to adapt to the changes. Discussions regarding changes in CRL would be initiated in the next one-to-two months, he said.