MFIs may have to recalibrate business in Assam following state curbs

The state government has imposed restrictions on lending and recovery practices in response to the 2019 flood crisis

The microfinance (MFI) industry begins CY21 on the backfoot, given the recent passage of the Assam Micro Finance Institutions (Regulation of Money Lending) Bill, 2020.

This Bill was tabled in response to the crisis that engulfed the state after the 2019 floods, which lay bare the loan recovery practices of the MFI industry and exposed the problem of over-indebtedness.

While the changes are radical, “the larger concern is whether Assam will set a precedent for other states”, says the CEO of a small finance bank, adding that the state proceeded with the Bill despite the RBI’s objection.

The new legislation, when made an Act, will restrict the way firms lend and recover loans, and make registration mandatory for all MFI agencies and organisations. Companies will have to furnish details on the areas they will operate in, and proposed interest rate.

As for borrowers, the cumulative loan outstanding has been capped at Rs 1.25 lakh — in line with the RBI’s guidelines — though not more than two lenders can lend to the same borrower, against three permitted by the RBI.

Capping the total indebtedness at Rs 30,000 for permanent tea garden workers with a single source of income and Rs 50,000 for those with multiple sources of income, as well as providing for a mandatory minimum repayment moratorium of three months after natural calamities, are norms more stringent than RBI regulations.

Restricting lenders from going to borrowers’ homes, is also the first-of-its kind.

Analysts at Macquarie Capital say the passage of the Act illustrates how reckless lending in an economically and politically vulnerable population leads to dire consequences.

Applicability of these norms to MFIs hasn’t been spelt out; analysts say excluding banks and SFBs would be pointless.

For Bandhan Bank, which draws 10 per cent of its loans from Assam, these curbs may be a near-to-medium-term dampener, though its share price isn’t reflecting these concerns for now.

Further, analysts at Edelweiss say the cap on leverage for tea plantation workers will hit the average ticket size of loans. Assam is the fourth largest MFI market, with Rs 11,400 crore of MFI loans and an average ticket size of Rs 48,500 per loan, as of FY20.

Even as further clarity is awaited, MFI-led stocks may not have it easy once the market resumes.