The Reserve Bank of India, which is in the process of harmonising regulatory norms for microfinance lenders, needs to remove uneven playing field which gives disproportionate benefit to entities other than finance companies.
The provisioning norms, rules for margins and access to credit information bureaus need to be harmonized.
RBI’s move to bring harmony across class of lenders in microfinance field in positive step. It would reduce the competitive intensity among the various forms of entities operating in this sector, India Ratings (Ind-Ra) in a statement.
There are four sets of lenders in micro finance space – finance companies, universal banks, small finance banks (SFBs) and not for profits companies and trusts.
RBI rules are clear for non-banking finance companies which work as micro-finance institutions (NBFC-MFIs). However, these guidelines are not explicitly applicable for microfinance by non NBFC-MFIs. Hence the other forms of entities operating in microfinance benefit disproportionately from this asymmetry.
In 2014, RBI prescribed rules for NFBC-MFIs placing limits on loan ticket size, loan tenor, the income profile of borrowers, processing fees, yields and code of conduct.
NBFC-MFIs as class is not the Dominant Form of MFIs now. The finance companies were the dominant form of microfinance some time ago when present eight SFBs and Bandhan Bank were also NBFC-MFIs.
Over time, the structure of industry has changed with some of the largest institutions converting into banks. Hence, several participants in this segment were not covered under the RBI circular for NBFC-MFIs, raging agency said.
Non-NBFC players are found wanting in adherence to RBI Guidelines for NBFC-MFIs. The borrowing costs of most mid-sized to large participants has declined over the last couple of years, but not as much as for banks. The margin caps were not explicitly applicable to institutions which were not operating as NBFC-MFIs.
Furthermore, many NBFC-MFI players have been observed to be weak in adhere to self-regulatory guidelines, credit bureau discipline, participation in various microfinance forums.
The provisioning norms followed are not same across institutions. Generally, NBFC-MFIs provide as per guidelines only for the overdue portion of an NPA loan. However, banks have to provide for the entire outstanding amount.
The access to credit bureau is not Uniform. Trusts, with microfinance as one of their objectives, can access credit bureaus to check borrowers’ records, but cannot submit their borrower data to the bureau, it added.