Microfinance self-regulator expects stress to stabilize by January

Mumbai: Microfinance Institutions Network (MFIN), the self-regulatory organization for the sector, expects the current bad loan stress that microlenders face to stabilize by January next year with new rules in place.

On Monday, the MFIN tightened the guidelines around microlending, after it first came out with the norms in July. The sector’s self-regulatory organization (SRO) made key changes including reducing the number of lenders to a borrower to 3 from 4 earlier, and capping the maximum indebtedness of a borrower at ₹2 lakh, including both micro and unsecured retail loans.

The new guidelines are prudent and will bring down delinquencies in the system, the MFIN’s chief executive officer Alok Misra told Mint in an interview.

“Stress peaking out is a multi-faceted factor, lending is a part of it. There might be other structural factors in the economy. Today it has been reported that there has been bumper Kharif output. Rabi sowing is in full swing. I hope by January things will stabilize,” said Misra.”

Under the new guidelines, the MFIN has also requested its members to stop lending to delinquent customers who have overdue loans for more than 60 days with an outstanding amount more than ₹3,000. Currently, lenders are not permitted to lend to customers with overdue for more than 90 days. If a loan is not serviced for 90 days, then it is classified as non-performing. The MFIN also proposes to seed PAN for 50% of the borrowers by March 2025, which is expected to strengthen the KYC process. The SRO clarified that other than processing fee and credit life insurance, no other charges can be deducted from the sanctioned loan amount.

Impact on growth

Citi in its research report said that the new norms will adversely impact growth as 7-8% of the total assets under management is exposed to borrowers from 4 lender associations.

Mishra, however, ruled out any further impact on loan growth or build-up of stress owing to these guidelines.

“Even before, the MFIN had three lender norm as part of code of responsible lending. Considering the logic that there is a higher chance of somebody being delinquent if they have more lenders/credit, in the current situation, we have brought back the old norm. Since delinquencies continued to be high in September, we feel that tightening of underwriting will bring back credit discipline ,” said Misra. 

“We don’t feel reducing the number of lenders will drive down funding. It will only rationalize liquidity and clients having more than stipulated lenders will have to taper to get within norms for fresh funding. Lenders may also deepen to white spaces to cover low penetration areas,” he added, referring to the gap between the products and services a lender offers and the needs of customers.

The MFI sector has seen a sharp asset quality deterioration in the first half of the fiscal due to a combination of factors like heatwave, slowdown in disbursement and rumours of loan waivers in the run-up to general elections. According to the quarterly report titled Micrometer released by the MFIN, the number of new loans disbursed by lenders in the first quarter fell 7.3% year on year. The portfolio quality (PAR 30 to 180 days overdue) also deteriorated to 2.69% as on 30 June 2024 from 1.80% during the same period a year ago. Portfolio at risk (PAR) is the percentage of MFI’s loan portfolio that is overdue and at risk of default. 

Last month, RBI banned two microlenders—Asirvad Micro Finance Ltd and Arohan Financial Services Ltd—for charging usurious rates and non-adherence with the regulatory guidelines on assessment of household income and consideration of existing or proposed monthly repayment obligations in their microfinance loans.

Interestingly, Arohan Financial Services’ managing director Manoj Nambiar was appointed chairperson of the MFIN just a few months ago.