No pre-payment penalty on MF loans

The RBI released its Consultative Document on Regulation of Microfinance on Monday. In the Statement on Developmental and Regulatory Policies dated February 5, 2021, released with the fifth Bi-monthly Monetary Policy Statement for 2020-21, the Reserve Bank of India (RBI) had announced that a consultative document will be issued for harmonising the regulatory frameworks for various regulated lenders in the microfinance space. Accordingly, the Consultative Document on Regulation of Microfinance has been released today for feedback from all stakeholders. The suggested framework in the Consultative Document is intended to be made applicable to the microfinance loans provided by all entities regulated by the Reserve Bank and is aimed at protecting the microfinance borrowers from over-indebtedness as well as enabling competitive forces to bring down the interest rates by empowering the borrowers to make an informed decision.

The key proposals of the document include a common definition of microfinance loans for all regulated entities and capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income.

Also, it talks of a Board approved policy for household income assessment. It stresses no pre-payment penalty and no requirement of collateral and greater flexibility of repayment frequency for all microfinance loans.

Moreover, it is for alignment of pricing guidelines for NBFC-MFIs with guidelines for NBFCs. Introduction of a standard simplified fact sheet on pricing of microfinance loans for better transparency has been emphasised in the document.

Besides, there is a provision for display of minimum, maximum and average interest rates charged on microfinance loans on the websites of regulated entities in the document.

Manoj Kumar Nambiar, MFIN chairman and MD of an MFI, Arohan Financial Services, says, "it's really a forward-looking discussion paper, primarily because it realises the fact that only 30 per cent of the banking sector was tightly regulated and needs the entire sector to be sustainable and help achieve the financial inclusion goal which we have been focusing on."

The RBI has invited comments/observations/suggestions on the Consultative Document, especially on the discussion points mentioned therein, are invited from banks, NBFCs including NBFC-MFIs, industry associations and other stakeholders latest by July 31.

Commenting on it, a Kotak Institutional Equities report says, "we do believe that this paper is still open for discussion and the final guideline is likely to undergo significant changes especially on household income and spreads relaxation criteria. From a business impact perspective, it appears to be negative for banks, neutral for SFBs and positive for NBFCs."

As per the report, the RBI paper is marginally negative for banks as the imposition of upper caps on household income (Rs13 lac for rural and Rs 0.2 mn for urban household) for loan ticket size would limit average ticket size growth.

Banks could always look to offer different products to this customer segment to limit the challenge. In our view, there is likely to be pushback on the income level caps from banks as the evidence on the ground suggests a much higher income at household level. Neutral for SFBs it is more of a business-as-usual situation as the fear of spread caps has not been introduced. Positive for NBFCs as the removal of spread caps relaxes the tight business conditions that they have been constrained to operate within so far, it added.