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RBI introduces new category of NBFC-Microfinance Institutions
Submitted by mffocus on Fri, 12/02/2011 - 21:54
Microfinance Focus, December 2, 2011: The Reserve Bank of India has decided to create a separate category of Non Banking Financial Company-Micro Finance Institution (NBFC-MFI).[ Download: RBI Circular on NBFC-MFIs ]
In a notification sent to all NBFCs, Reserve Bank of India communicated that based on the recommendations of the Malegam Committee Report, it has decided to introduce a new category of NBFCs - Non Banking Financial Company-Micro Finance Institutions.
RBI has issued NBFC-MFI Directions, 2011 which sets a minimum Net Owned Fund requirement of Rs. 5 crore for an NBFC to qualify as NBFC-MFI. Those located in the North eastern region should have a minimum NoF of Rs. 2 crore for purposes of registration. The existing NBFCs to be classified as NBFC-MFIs will be required to comply with this norm from April 01, 2012.
Under the new regulation, NBFC-MFIs shall maintain an aggregate margin cap of not more than 12%. The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets.
Interest on individual loans will not exceed 26% per annum and calculated on a reducing balance basis. Processing charges shall not be more than 1 % of gross loan amount. Processing charges need not be included in the margin cap or the interest cap.
NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges where recovered, shall be as per IRDA guidelines.
Under the new regulation, NBFC-MFIs can lend to individual borrowers who are not member of Joint Liability Group (JLG)/Self Help Group (SHG) or to borrowers that are members of JLG/SHG.
However a borrower cannot be a member of more than one SHG/JLG and not more than two NBFC-MFIs should lend to the same borrower.
The regulation clarifies that there shall be only three components in the pricing of the loan viz., the interest charge, the processing charge and the insurance premium (which includes the administrative charges).
Existing NBFCs that satisfy the prudential norms can now register with the Regional Office in the jurisdiction of which their Registered Office is located for change in their classification as NBFC-MFIs.
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Download: RBI Circular on NBFC-MFIs: Click
A Positive step
This is the most waited direction from the central bank. This move will enable the industry to get access bank funding and alleviate a major drawback. Now, the industry will come under the ambit of organized financial sector. Transparency and Pricing of Credit will play vital rule to build confidence among all the section concern. And significantly Net Owned Fund is kept Rs. 2cr. for North East while NoF is Rs. 5cr. for other state.
Standardization of usury caps?
Eight countries in West Africa have a 27% interest rate cap for microfinance. Recently, Bangladesh also put in 27%. The RBI's decision to put in 26% is about there. Add the 1% processing fee and we go back to 27% (28% if take the processing fee on average balance and assuming the loan is not less than a year).
Considering that the world average interest rates were 26% to 28% (mean/median), such caps should push averages down further. All this is good news from the side of the borrower especially if MFIs are showing that they can be sustainable at these interest rate levels.
The exact interest rate caps don't really matter. Could be a few percent points higher or lower. What is really nice to see is that the regulator is finally understood that setting usury caps is a political decision. Not setting them is also a decision, but may look like indecision.
Of course the cap in Andhra Pradesh's ordinance which was set at 100% was meaningless. But it got people excited and stirred up a debate on what figures should be meaningful.
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