1592899775_7Uxh1r_RBI_final.jpg 
Icra added that the REs include NBFC-MFIs, scheduled commercial banks (SCBs), small finance banks (SFBs), NBFC, investment and credit companies (NBFC-ICCs) and others
Photo Credit :
The Reserve Bank of India (RBI) has issued master directions on the regulatory framework for microfinance on March 14, 2022, which builds upon the consultation paper issued on the subject on June 14, 2021.
The revised framework will be applicable from April 1, 2022 and it makes the regulations lender agnostic as it is applicable to all the RBI regulated entities (REs) involved in microfinancing activities.
According to Icra, the revised regulatory framework aims to provide a level playing field to all the players involved in microfinancing activities and would provide more flexibility to the non-banking financial company – microfinance institutions (NBFC-MFIs), though at the same time the enhanced limits for maximum permissible indebtedness of borrowers pose a risk of over-leveraging in the industry.
Icra added that the REs include NBFC-MFIs, scheduled commercial banks (SCBs), small finance banks (SFBs), NBFC – investment and credit companies (NBFC-ICCs) and others.
Sachin Sachdeva, Vice President and Sector Head, Financial Sector Ratings, ICRA, said, “RBI has aligned the definition of microfinance loans across all REs, which will include collateral-free loans to households with an annual household income of Rs. 3.00 lakh. The regulator has enhanced the annual household income threshold than what was proposed in the consultation paper in June 2021 and this could increase the maximum permissible indebtedness limit of borrowers than the current level."
Sachdeva added that in addition, RBI has removed the the cap on the number of NBFC-MFIs who can provide loans to a microfinance borrower. Instead, it has focused on borrowers’ repayment capacity and accordingly capped the fixed obligation to income ratio (FOIR) at 50 per cent.
"Though the cap on FOIR would help in keeping the check on leveraging of borrowers, the enhanced indebtedness limit and divergence in household income assessment criteria across lenders would pose the risk of over-leveraging," Sachdeva said.
With the cap of 50 per cent on the FOIR and annual household income level of Rs 3.00 lakh, the maximum permissible indebtedness of microfinance borrowers (household level) would increase significantly from the current levels (Rs. 1.25 lakh). Assuming a tenure of 24 months and an interest rate of 22 per cent per annum, the maximum permissible household-level loan comes to around Rs. 2.40 lakh, Icra said.
Sachdeva added, “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.”