“RBI has proposed to align the definition of microfinance loans across all REs, which will include collateral-free loans to households with annual household income of Rs. 1.25 lakh and Rs. 2.00 lakh for rural and urban/semi-urban areas, respectively.” said Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA in a statement. He also added, “RBI has proposed to focus on borrowers’ repayment capacity and accordingly proposed to cap the fixed obligation to income ratio (FOIR) at 50%. The proposed set of rules would be applicable for all lenders and with the focus on borrowers’ repayment obligations in relation to the total household income is expected to help mitigate the issue of over-leveraging at the borrower level, if implemented properly.”
With the proposed cap on the FOIR and household income level, the maximum permissible indebtedness of rural microfinance borrowers could be lower than the current levels (Rs. 1.25 lakh) unless the tenor is extended (currently about 24 months) while the same could increase for microfinance borrowers in urban/semi-urban areas.
Sachin Sachdeva also said, “Though NBFC-MFIs will enjoy more flexibility, they will have to put in place board-approved policies on household income assessment, loan pricing regulations and other related aspects. In addition, increased data gathering, comprehensive credit bureau checks and enhanced disclosure requirements may slightly increase the operating costs.”
The current regulatory framework for NBFC-MFIs imposes a cap on the rate of interest charged by them while other lenders are not required to adhere to the same. The RBI has also proposed to remove the said cap on the interest rate, which is expected to provide more flexibility to NBFC-MFIs and create a level playing field for all the REs. Moreover, the interest rate ceiling had been working as a de facto interest rate in the industry for all the players and the removal of the same is expected to make the players compete on loan pricing, thus benefiting the borrowers in the long term. However, given the low interest rate elasticity in the sector and given the moderation in the profitability because of the Covid-19 induced stress, the transmission of any rate benefits may be delayed.