Microfinance Focus, December 5, 2011: The beleaguered Indian microfinance industry sees the new norms issued by the Reserve Bank of India for NBFC-MFIs as a positive step forward.

Bringing NBFC-MFIs under its jurisdiction, RBI has capped the interest rate charged by them at 26% per annum and issued a series of prudential and customer protection regulations.

Samit Ghosh, Chief Executive Officer & Managing Director of Ujjivan Financial Services, one of India’s largest NBFC-MFI told Microfinance Focus that the new announcement is big positive step for the industry, as finally importance of microfinance has been officially recognized by creating a separate category of NBFC-MFI.

“We have been requesting this for a long time. This will also permit the RBI to put a special focus on this category and pave the way to permit NBFC-MFIs to offer savings services to our customers which is urgently required. NBFC-MFIs are the only NBFC’s whose assets qualify for priority sector. This will help on the bank funding front”, he said.

Speaking on how Ujjivan will be implementing the new rules, Ghosh said, “We are compliant with the new RBI regulations and do not foresee any major issues”.

However he pointed out that there are couple of areas which need further clarification from the RBI and the industry will take up these issues through MFIN (Microfinance Institutions Network).

Highlighting the contradiction on one SHG/JLG rule and maximum of two MFIs lending to the customer, Ghosh said, “The first can only be implemented after SHG data is uploaded with the credit bureaus. Secondly, margin cap computation needs to be clearly defined, an issue we have already taken up with RBI”.

Professor N. Srinivasan, Author of State of the Sector Report, said that the regulations issued by RBI are now addressed to MFIs.  Earlier in May the regulations were issued, but for Banks that were financing MFIs.  The regulations issued now fully incorporate the earlier regulations.

“The regulations mark the first effort to regulate NBFC-MFIs through prudential and customer protection measures.  Unlike the guidelines issued to banks in May 2011 which depended on priority sector lending norms as the basis for enforcing compliance, the current regulations have been issued under the appropriate section of the RBI Act from which RBI regulatory powers over NBFCs flow”, he said.

Prof. Srinivasan feels that the definition of NPA will shift the focus of MFIs from PAR which is a more rigorous indicator of portfolio quality where even 1 day’s overdue loans were tracked. The provisioning norms seem harsh when seen in the light of longer loan maturities to be introduced on larger loans.

“The entry requirements of owned funds and the CRAR for even the smaller NBFC MFIs is likely to trigger a search for equity and tier- II capital.  A number of MFIs will have a negative networth net of provisioning in the wake of AP loan losses.  With 100% of loans having to be provided for, the Quarter ending December 2011 will reflect the full burden of provisions arising from AP portfolio.  For these MFIs raising equity will not be an easy task.  These institutions will find it difficult get a registration as NBFC-MFIs from RBI in the absence of CRAR of at least 12%”, he said.

Further, Prof. Srinivasan added that the regulations do not require MFIs to submit any special data or periodic information that RBI could use to test compliance with the regulations - for example with interest and margin caps.

“RBI might introduce specific reporting for NBFC-MFIs so that it can examine compliance with regulations off-site, rather than the expensive option of on-site supervision", he said.

Microfinance institutions association Sa-Dhan also welcomes the RBI move to introduce a new category of NBFC-MFIs. “This has been our longstanding demand with the RBI specific to the NBFCs engaged in providing microfinance services” said Mathew Titus, Executive Director, Sa-Dhan.

Referring to Sa-Dhan’s latest ‘Bharat Microfinance Report 2011’ that has captured the status of the microfinance sector vis-à-vis the RBI guidelines issued earlier, he added that “In fact, more than 80% of the NBFC-MFIs are already complying with the norm of Net Owned Fund of Rs. 5 crore”.

He particularly welcomed the lower NOF requirement of Rs. 2 crore for the North East that would encourage new NBFCs to work in un-served and under-served states.

Following RBI’s announcement, SKS Microfinance gained almost 5 percent on the bourses and today traded at Rs. 107. 60.