India Ratings and Research (Ind-Ra) opines that the key changes in the final regulations for microfinance institutions (MFIs) will bring in the entire industry under the regulatory coverage unlike one-third of the industry coverage earlier.
Moreover, the ability of small and mid-sized MFIs players to implement risk-based pricing would enable building both scale and operating buffers, resulting in improved credit worthiness in the eyes of lenders. This is in line with the agency's FY23 Outlook: Microfinance where it had said that the viability of the small-medium MFIs could improve post the implementation of the proposed harmonisation guidelines. The notification is also expected to improve the ability of non-bank finance company (NBFC)-MFIs to penetrate into newer geographies, as pricing can now be differentiated, and cover the higher operating costs for the same," the ratings agency has said.
"The Reserve Bank of India's (RBI) announced 'Master Direction - Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022', on 14 March 2022 (effective from 1 April 2022). The key changes in the final regulations include the widening of the definition of regulated entities to include commercial banks, co-operative banks, district/state central co-operative banks, NBFC-MFIs, NBFC housing finance companies (HFCs), as well as the removal of pricing caps. The RBI also expects the not-for-profit companies (with assets under management more than INR1 billion) involved in the microfinance activities to apply for an NBFC-MFI licence," India-Ra has said.
These guidelines withdraw the regulated pricing caps and allow NBFC-MFIs to implement risk-based pricing based on the customers' risk profile (more driven by the board's policies on pricing), although the RBI does keep the right to qualify interest rates usurious in case it deems so. The new guidelines expand the definition of microfinance borrowers (in terms of household income assessment) and reduce the qualifying assets criteria to 75% from 85% of the total assets earlier.
"This could spur investments by NBFC-MFIs in building capabilities in other loan products that an MFI customer can graduate to," the ratings agency has said.