MFIs may get activity-based norms soon, making them institution-agnostic

The piece of legislation in Assam — the Assam Micro-Finance Institutions (Regulation of Money Lending) Bill, 2020 —may fast-track making the lending process in the sector institution-agnostic by creating a common code of conduct. The Bill, passed last Wednesday, regulates the amount of lending on the basis of the borrower’s profile and makes registration mandatory for operations in Assam.

Lenders fear overlap in regulation and supervision between the state government and the central bank. They are in the process of seeking clarity from the Reserve Bank of India (RBI) whether the provisions of the Bill will hold good for them. Incidentally, the RBI had conveyed its concern to the state government ahead of the passage of the Bill.

“This is a classic case of dual regulation and overlap of jurisdiction like we saw in Andhra Pradesh 10 years ago,” said Manoj Kumar Nambiar, chairperson of the Microfinance Institutions Network (MFIN), a self-regulatory organisation for the industry.

The emerging situation is akin to what prevailed in urban-co-operative banks with dual control between the registrar of co-operatives and the RBI. This was rectified in June last year with these banks being brought under the regulatory framework of the RBI by amending the seven-decade-old Banking Regulation Act, 1949.

Tensions in Assam over loans given by micro-finance institutions (MFIs) have been building up ever since the floods of 2019.

Highly-placed sources say the matter has been escalated to the RBI, which is for unified regulations for MFI loans. Currently, only those MFIs registered as non-banking finance companies (NBFCs) are governed by the Non-Banking Fina­ncial Companies Micro Finance Instit­utions (RBI) Directions (2011) norms. These are not app­licable to banks or small finance banks (SFBs) and non-NBFC MFIs active in this segment.

“Work is underway to bring activity-based norms for the MFI sector and make it institution-agnostic,” said a person privy to the development, adding, “with Assam introducing this Bill, the revised guidelines may be released soon”.

In November, RBI Deputy Governor M Rajeshwar Rao had spelt out the need for MFI regulations to be determined by the type of activity rather than the institution taking part in it. This is because MFIs now account for only a third of this business. Banks and SFBs make up for the rest.

“The core of microfinance regulation lies in customer and consumer protection,” Rao said at an ASSOCHAM E-Summit on NBFCs in November last year. The central bank is also expected to unify lending rates for MFI loans across institutions.

“For every 100 basis point reduction in the cost of funds, spreads of NBFC-MFIs reduce by roughly 2.75 per cent,” said Padmaja Reddy, founder and managing director of Spandana Sphoorty Financial. This affects the competitiveness of these lenders. A mark-up of 10 per cent to the cost of funds is allowed for NBFCs-MFIs, whereas for other lenders (banks and NBFCs) there are no pricing guidelines. This regulatory disparity may be curbed in the revised regulations.

Meanwhile, banks are in the process of seeking clarity from the RBI whether Assam’s MFI Bill will be applicable to them.

Money lending is a state subject and as banks fall under the RBI’s purview, they are excluded from the states’ regulations in this regard. “Banks, including SFBs, should not form part of the Bill,” said the chief executive officer (CEO) of an SFB. However, as the Bill mentions MFIs without defining the ambit of lending institutions, it is leading to ambiguity among lenders.

Bandhan Bank, IndusInd Bank, HDFC Bank and RBL Bank are among prominent lenders to MFIs and have exposure to Assam. Bandhan Bank’s Assam portfolio is sized at Rs 7,000 crore and accounts for over 55 per cent of Assam’s MFI market at roughly about Rs 12,000 crore. The state is the fourth-largest MFI market in the country. “Representatives of the RBI, MFIN, and other organisations are working with the Assam government to finalise the detailed guidelines,” said Nambiar.

After the Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Ordinance of 2010, Assam is the first state to pass a similar Bill. Bankers questioned the efficacy of the Andhra Pradesh Ordinance and pointed out that it resulted in organised players vacating the state.

“A similar outcome is likely in Assam if the government sticks to the Bill in its current form and seeking legal recourse cannot be ruled out,” said a banker.