India Ratings and Research (Ind-Ra) believes the proposed harmonisation guidelines are the need of the hour to address the diverse interpretations of regulations by the multiple forms of entities (mostly regulated) involved in microfinance. The Reserve Bank of India's (RBI) consultative document on the regulation of microfinance dated 14 June 2021 proposes to include a common definition of microfinance loans applicable to all regulated entities. In addition, it tries to achieve a common process to arrive at the maximum permissible borrower indebtedness, by doing away with the cap on the number of lenders per borrower and pricing caps.
The proposals have the potential to create a level playing field for non-banking finance companies- microfinance institutions (NBFC-MFIs), while also providing mid and small sized MFIs with the ability to lend profitably. The current lending caps make balance sheet lending challenging, as some of them have borrowing costs in the range from 13%-15% which leaves little space for operating costs and possible credit costs.
Pricing- Positive Implications for NBFC-MFIs: These could have significant, substantially positive implications for NBFC-MFIs, especially for mid and small sized ones which were unable to originate substantially and their commercial competitiveness had significantly reduced once the lending rate came down to 21.5% on account of the price caps. These price caps were on the basis of Malegam Committee recommendations, given the span and variation in pricing and disclosure mechanisms prevalent before. In addition, only 30% of the microfinance industry was constituted by NBFC-MFIs where the RBI guidelines were mandatory while it was voluntary for the rest. Most non-NBFC MFIs are not following the RBI price caps for NBFC-MFIs; the proposed harmonisation guidelines could be a positive for NBFC-MFIs in this regard. From the borrowers' point of view, this could result in increased cost of credit; nevertheless, this borrower segment's demand and performance are reasonably inelastic to pricing range as it exists now (19%-25%).