The Reserve Bank of India (RBI), on Friday, said that it is looking to review the regulatory framework for microfinance which would be uniformly applicable to all lenders in the microfinance space, including scheduled commercial banks, small finance banks and other such entities. Currently, RBI guidelines on microfinance regulate NBFC-MFIs primarily.

In his monetary policy statement on Friday, RBI Governor, Shaktikant Das, said: “The microfinance sector plays an important role in last-mile delivery of credit to needy segments. In view of the evolving role of the sector and the need for a robust framework for enhanced delivery of last-mile credit and strengthening consumer protection, the Reserve Bank will come out with a consultative document harmonising the regulatory frameworks applicable to various regulated lenders (NBFC-Micro Finance Institutions, Scheduled Commercial Banks, Small Finance Banks and NBFC–Investment and Credit Companies) in the microfinance space.”

The MFI industry, which includes banks (universal banks and small finance banks included), NBFCs and NBFC-MFIs, had a total loan portfolio of ₹2,31,778 crore as of September 30, 2020. The industry served 5.71 crore unique borrowersthrough 10.50 crore loan accounts.

Banks hold the largest share of the portfolio in micro-credit, with a total loan outstanding of ₹94,355 crore, accounting for nearly 41 per cent of the total loan portfolio. NBFC-MFIs are the second largest provider of micro-credit, with a loan amount outstanding of ₹69,933 crore, accounting for around 30 per cent. SFBs have a total loan amount outstanding of ₹43,142 crore, with a total share of 18.61 per cent per cent; NBFCs account for another 9.52 per cent, and other MFIs account for 0.99 per cent of the total loan portfolio, according to information available from MFIN Micrometer.

Sustainable growth

Welcoming the proposed move by theRBI, MFIN, the association for microfinance entities and the self-regulatory organization for NBFC-MFIs, said this would help bring a sustainable growth for the sector.

“This is indeed a welcome step for the sector. Considering the diversity of players in microfinance today, it is the need of the hour, and MFIN has been proactively working on this through its Code of Responsible Lending (CRL) and also requesting the RBI on the need for asset class-based regulation. This is a very important move as it will augur well for the sector as a whole and further safeguard the interests of the customers. MFIN looks forward to working closely with the RBI on this important initiative,” said Alok Misra, CEO and Director, MFIN.

MFIN had developed the CRL to bring differently regulated entities, including NBFC-MFIs, Banks, SFBs, NBFCs and Non-profit/Section 8 MFIs, to agree and adopt a uniform common code for customer conduct and ensure a level-playing field. The CRL has as many as 113 signatories, representing 70 per cent of the market.

Risk mitigation

According to Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank, the Malegam committee on microfinance, about 10 years back, played a huge role in strengthening the foundations of the Indian microfinance industry by setting up policy contours around a host of areas, including lending process, pricing of interest rates, increasing transparency, capital and provisioning norms, and reducing the problems of multiple lending and over borrowing.

“Since over a decade has passed since the Malegam committee, a fresh and comprehensive review of the sector will certainly be a timely and relevant initiative towards harmoniszing the regulatory framework for the industry for various kinds of entities that can be followed uniformly across the country. This will put the industry in a position of further strength to help millions of poor Indian households with better risk mitigation and stronger financial inclusion,” he said.

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