By Prabal Goel, IFMR Capital
On August 03, 2012, RBI came out with its ‘Non Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) – Directions – Modifications’1 via which RBI has made changes to Directions issued on December 02, 2011 in light of representations received by it from NBFCs functioning in the microfinance sector. Let us look at the important provisions of the directions.
A procedural requirement introduced by the Directions is that to function as an NBFC-MFI, an NBFC must now seek registration with Reserve Bank of India as an NBFC-MFI. Failing this, an NBFC shall not be capable of advancing more than 10% of its assets to the Microfinance sector and shall not be treated as an NBFC-MFI. This change in classification shall be recorded in the Certificate of Registration of the NBFC. The last date for the application of registration is October 31, 2012.
In a move sure to bring relief to the NBFCs functioning in the sector in the country, Reserve Bank of India has decided to relax the criteria regarding the Qualifying Assets to some extent. As per the changes introduced, the assets existing on the January 1, 2012, whether or not they fall within the compass of “Qualifying Assets” as defined in the Master circular on NBFC-MFI2 , shall be taken into consideration in calculating the ratio of Qualifying Assets to the net assets. The aggregate amount of loans that an NBFC-MFI may extend for income generation activities may not be less than 70% of the total loans extended by NBFC-MFI. Earlier, the floor was 75%. Thus, a modicum of relaxation has also been introduced at this level, as the ground realities have been recognised that the target clientele of microcredit being at subsistence level, their basic human requirements cannot be overlooked. On multiple lending, RBI has clarified that a person who borrows as an individual cannot thereafter borrow from an NBFC-MFI as member of an SHG or JLG. Again, the same SHG/JLG/individual cannot borrow from more than 2 MFIs.
NBFC-MFIs have also been directed to be members of at least one credit information company and to provide them with timely and accurate data and use the data available with them to ensure compliance with the conditions regarding membership of SHG/ JLG, level of indebtedness and sources of borrowing. As a safety measure to avoid concentration in specific geographical locations, NBFC-MFIs may approach their Boards. All NBFC-MFIs have also been directed to become member of at least one Self-Regulatory Organization (SRO) recognized by the Reserve Bank of India.
The Directions introduce flexibility in terms of pricing individual loans. Earlier, the interest rate cap on individual loans given by MFIs was fixed at 26% and the margin at 12%. Post these directions, the average interest rate on the loans is still limited to the sum of average borrowing costs plus margin or 26%, whichever is lower but the interest rate on individual loans given by MFIs may be more than 26%. Also, the caps on margin have been revised to 10% for large MFIs (loans portfolios exceeding Rs.100 crores). The maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent. The average interest paid on borrowings and charged by the MFI are to be calculated on average monthly balances of outstanding borrowings and loan portfolio respectively.
The Directions also recognise the problems faced by MFIs with respect to loans originated in Andhra Pradesh. With regard to the portfolio in Andhra Pradesh, NBFC-MFIs have been directed to ensure that the provisioning made towards the portfolio in Andhra Pradesh should be as per the current provisioning norms. For the purpose of calculation of Capital to Risk Weighted Assets Ratio(CRAR), however, the provisioning made towards portfolio in Andhra Pradesh shall be notionally reckoned as part of Net Owned Funds and there shall be progressive reduction in such recognition of the provisions for AP portfolio equally over a period of 5 years. No write-back or phased provisioning is permissible. As far as portfolio in other states is concerned, the provisioning will be as per the December 2, 2011 circular3 , with effect from April 1, 2013.
There has been a mixed response in the Microfinance sector to the Directions. While the directions relating to reduction in margin cap for larger MFIs have been criticised, the operational clarifications concerning MFIs being part of at least one Credit Information Company and at least one Self-Regulatory Organization (SRO) which is recognized by the Reserve Bank of India have been welcomed.4
1 – DNBS (PD) CC.No.300 /03.10.038/2012-13
2 – DNBS.(PD)CC.No.293/03.10.38/2012-13
3 – DNBS.CC.PD.No. 250/03.10.01/2011-12
4 – “RBI relaxes NBFC-MFI rules: Positives and negatives”, http://www.moneycontrol.com/news/business/rbi-relaxes-nbfc-mfi-rules-positivesnegatives_740629.html ( last visited on August 10,2012)