Sa-Dhan moots uniform tool for income assessment of microfinance borrowers

Sa-Dhan, a self-regulatory organisation in the microfinance sector, in its recommendations to the Reserve Bank of India (RBI), has asked the central bank to introduce a uniform mechanism for income assessment of the borrowers, which can be used by all the lenders in the space.

In its consultative paper last month, the RBI had said all regulated entities should have a board-approved policy in place enumerating the factors considered for the assessment of household income. Sa-Dhan has said it has developed a credit assessment tool for supporting the sector in getting accurate income assessments.

Many experts had said that it was a positive move by the RBI to not prescribe a common structure for income assessment and rather leave it to the individual organisations to do their own assessment. From a borrower’s perspective, the good thing is that the family income will be calculated, not individual income.

Sa-Dhan has also recommended that a ‘Ration Card’ should be used as a base to identify a household in case they are migrant labours. As per RBI, the definition of household, which it derives from National Sample Survey Office, is a group of persons normally living together and taking food from a common kitchen that will constitute a household.

Sa-Dhan has said that while migrant labours would not be living together and using a common kitchen, they do contribute in the household income. “Therefore, exclusion of these members will give an improper household income assessment”.

However, around 19 per cent of the rural population and 33 per cent of the urban population do not possess any ration card. “In case ration card not available, Aadhar should be allowed as identification for such cases. This is required as microfinance institutions may be allowed the discretion to come to conclusions on what is a family (in the absence of a ration card)”, they said.

It has also recommended that the income limit of rural and urban households should be the same at Rs 2 lakh per anum for them to be identified as a microfinance borrower. As per RBI norms, a microfinance borrower is identified by annual household income not exceeding Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas.

The RBI, in its consultative paper on the microfinance sector, has proposed to lift the interest rate cap on microfinance institutions (MFIs) so that there is no arbitrage for certain market participants in the sector. It also proposed a debt-income ratio cap and said the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income. This debt-income cap, the RBI felt, would obviate the need for having multiple restrictions being faced by MFIs only.

Sa-Dhan in its recommendations has said that income limits should be linked with inflation so that they can be revised timely on a regular basis, once every 2-3 years.

Among other things, it has asked the RBI to either lower the ‘Qualifying Asset Criterion’ or include a sub-segment within the microfinance definition for matured borrowers. “This is for those with annual income between Rs 2-5 lakh who wish to graduate up to higher ticket size loans to set up microenterprises and access credit for affordable housing. Using the total household disposable income calculated from the cash flows under the income assessment format.”