New directions to NBFC-Micro Finance Institutions

In the backdrop of Andhra Pradesh -MFI crisis, RBI had made modifications to its earlier directions to NBFC-MFIS to regulate the credit system in the country. Pursuant to being satisfied that the sector has largely moved forward since then, RBI now amended the Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 (Notification DNBS.PD.No.008/CGM(CDS)-2015 dated March 27, 2015). RBI circular dated 08.04.2015 states that amendment is considered necessary for the purpose of enabling the Bank to regulate the credit system to the advantage of the country. The salient changes in the amendments are as under.

“Qualifying assets” shall mean a loan which satisfies the following criteria:-

1. Loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 1,00,000 or urban and semi-urban household income not exceeding Rs. 1,60,000/=
2. Loan amount should not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000/= in subsequent cycles;
3. Total indebtedness of the borrower does not exceed Rs.1,00,000/-. Education and medical expenses will be excluded while arriving at the total indebtedness of a borrower.
4. Tenure of the loan not to be less than 24 months for loan amount in excess of Rs.15,000 with prepayment without penalty;
5. Loan to be extended without collateral;
6. Aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs. The remaining 50% of the total loans can be for other purposes such as housing repairs, education, medical and other emergencies.
7. Loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

As per the circular, the above said Directions shall be amended with immediate effect. The communiqué further says that “Notwithstanding anything contained above, all NBFC-MFIs are expected to be prudent and responsible in their lending activity besides educating their borrowers on the dangers of wasteful conspicuous consumption”.