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RBI’s recommendations for MFIs
We believe that the recommendations of RBI’s committee on regulation
of micro finance institutions (MFI) are in a positive direction as (1) they
suggest that MFIs be regulated by RBI instead of the state governments
and (2) committee is not excessively restrictive on profitability of MFIs,
but stress on sound business fundamentals. RBI has also permitted banks
to restructure loans to MFI till Mar-11 that will provide some relief to
MFIs as banks may become accommodative and extend the repayment
period for the MFIs. These recommendations are neutral for companies
providing small ticket secured loans, including gold loan NBFCs.
Committee suggests a new class of NBFCs focussed on micro-finance
RBI's committee on micro finance institution (MFI) has recommended that the
central bank should form a new class of NBFC that focus on providing microfinance
(NBFC-MFI). The committee has recommended that RBI should take
up the regulation of these companies and have proposed state governments
to avoid interfering with their functioning. To qualify as a NBFC-MFI, the
committee has stated that the NBFC should be a company which provides
“financial services pre-dominantly to low-income borrowers, with loans of
small amounts, for short-terms, on unsecured basis, mainly for incomegenerating
activities, with repayment schedules which are more frequent than
those normally stipulated by commercial banks”. The additional requirements
that will have to be complied with are given on page 2.
Focus on sound business model and moderate profitability…
We believe that the recommendations aim to make the business of micro
finance sound and reflect on RBI's conservative stance on consumption loans
and over-leveraging of borrowers. Moreover, the proposed cap on yields
and margins seem to be manageable, especially for large players. In this
context, it is proposed that banks' lending to MFI will continue to be classified
as eligible for priority sector targets; this is expected to ensure steady flow of
funds at reasonably low costs to MFIs. But the cap on maximum income of
household (Rs50,000 pa) may be small, especially in the context of microcredit
in urban centers, and RBI may look to raise the limits based on class of
town/ village.
… along with limited interference from state governments
A key positive from these recommendations is that committee has proposed
that NBFC-MFI should be exempt from the State Money Lending Acts and also
that if these recommendations are accepted, then the Andhra Pradesh Micro
Finance Institutions (Regulation of Money Lending) Act can be repelled. If the
Andhra Pradesh government agrees to these proposals, it could make the
functioning of MFIs lot smoother in the state as they will not need to (1)
receive approval from government officers before disbursing the loan and (2)
setting collection centers at a public place.
RBI has also permitted banks to restructure loans to MFIs
RBI has also permitted banks to restructure loans to MFI till Mar-11 and has
recommended banks to maintain steady flow of funds to MFI that will help the
liquidity levels of MFIs. The permission to banks to restructure loans to MFI
will provide some relief as banks may become accommodative to give slightly
longer time to MFIs to repay loans. While these measures are incrementally
positive, our interaction with banks indicates that some of them may create
floating provision towards potential losses in this segment.
Additional qualifications for NBFC to be classified as NBFC-MFI are:
1. At least 90% of total assets (ex cash, bank balance and money market
instruments) should be in the form of qualifying assets
2. Annual family income of borrowers should not exceed Rs50,000
3. Individual borrowings from MFI should not exceed Rs25,000
4. At least 75% of loans should be for income generating purposes
5. Cap on yields- 24% on loans to individuals
6. Cap on margins- 10% for those with assets of Rs1bn or more and 12% for
smaller ones
7. Over and above the margins, MFI can charge customers with fees on loan
processing (up to 1% of loan amount)
8. MFIs can recover the actual cost of providing insurance to the borrower
9. Committee has recommended that MFIs should provide only specified
forms of other services and ensure that income from these services is
within specified limits of total income.
The committee has also recommended various measures to avoid multiple
lending, over-borrowing and coercive methods of recovery. In this direction
they have suggested that no more than two MFIs should lend to the same
borrower.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI’s recommendations for MFIs
We believe that the recommendations of RBI’s committee on regulation
of micro finance institutions (MFI) are in a positive direction as (1) they
suggest that MFIs be regulated by RBI instead of the state governments
and (2) committee is not excessively restrictive on profitability of MFIs,
but stress on sound business fundamentals. RBI has also permitted banks
to restructure loans to MFI till Mar-11 that will provide some relief to
MFIs as banks may become accommodative and extend the repayment
period for the MFIs. These recommendations are neutral for companies
providing small ticket secured loans, including gold loan NBFCs.
Committee suggests a new class of NBFCs focussed on micro-finance
RBI's committee on micro finance institution (MFI) has recommended that the
central bank should form a new class of NBFC that focus on providing microfinance
(NBFC-MFI). The committee has recommended that RBI should take
up the regulation of these companies and have proposed state governments
to avoid interfering with their functioning. To qualify as a NBFC-MFI, the
committee has stated that the NBFC should be a company which provides
“financial services pre-dominantly to low-income borrowers, with loans of
small amounts, for short-terms, on unsecured basis, mainly for incomegenerating
activities, with repayment schedules which are more frequent than
those normally stipulated by commercial banks”. The additional requirements
that will have to be complied with are given on page 2.
Focus on sound business model and moderate profitability…
We believe that the recommendations aim to make the business of micro
finance sound and reflect on RBI's conservative stance on consumption loans
and over-leveraging of borrowers. Moreover, the proposed cap on yields
and margins seem to be manageable, especially for large players. In this
context, it is proposed that banks' lending to MFI will continue to be classified
as eligible for priority sector targets; this is expected to ensure steady flow of
funds at reasonably low costs to MFIs. But the cap on maximum income of
household (Rs50,000 pa) may be small, especially in the context of microcredit
in urban centers, and RBI may look to raise the limits based on class of
town/ village.
… along with limited interference from state governments
A key positive from these recommendations is that committee has proposed
that NBFC-MFI should be exempt from the State Money Lending Acts and also
that if these recommendations are accepted, then the Andhra Pradesh Micro
Finance Institutions (Regulation of Money Lending) Act can be repelled. If the
Andhra Pradesh government agrees to these proposals, it could make the
functioning of MFIs lot smoother in the state as they will not need to (1)
receive approval from government officers before disbursing the loan and (2)
setting collection centers at a public place.
RBI has also permitted banks to restructure loans to MFIs
RBI has also permitted banks to restructure loans to MFI till Mar-11 and has
recommended banks to maintain steady flow of funds to MFI that will help the
liquidity levels of MFIs. The permission to banks to restructure loans to MFI
will provide some relief as banks may become accommodative to give slightly
longer time to MFIs to repay loans. While these measures are incrementally
positive, our interaction with banks indicates that some of them may create
floating provision towards potential losses in this segment.
Additional qualifications for NBFC to be classified as NBFC-MFI are:
1. At least 90% of total assets (ex cash, bank balance and money market
instruments) should be in the form of qualifying assets
2. Annual family income of borrowers should not exceed Rs50,000
3. Individual borrowings from MFI should not exceed Rs25,000
4. At least 75% of loans should be for income generating purposes
5. Cap on yields- 24% on loans to individuals
6. Cap on margins- 10% for those with assets of Rs1bn or more and 12% for
smaller ones
7. Over and above the margins, MFI can charge customers with fees on loan
processing (up to 1% of loan amount)
8. MFIs can recover the actual cost of providing insurance to the borrower
9. Committee has recommended that MFIs should provide only specified
forms of other services and ensure that income from these services is
within specified limits of total income.
The committee has also recommended various measures to avoid multiple
lending, over-borrowing and coercive methods of recovery. In this direction
they have suggested that no more than two MFIs should lend to the same
borrower.
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