NBFC body looks to distance itself from MFI controversy

In an effort to distance itself from the controversy surrounding microfinance institutions (MFIs), the Finance Industry Development Council (FIDC), the self-regulatory organisation of non-banking finance companies (NBFCs) in asset financing, plans to approach the Malegam Committee, set up by the Reserve Bank of India (RBI) to look into MFI activities.

T T Srinivasaraghavan, managing director of Sundaram Finance, said FIDC had sought an appointment with the Malegam Committee to clarify that the organisation’s position was distinct from an MFI.

Most of the bigger MFIs in the country are registered as NBFCs, and several NBFCs in asset financing are also in the business of providing micro-credit (below Rs 50,000) in rural areas.

“The NBFCs in the asset financing business are well regulated for the last 13 years, with all the prudential norms in place. In fact, they need to have 60 per cent of their assets and income from asset financing, which is their core business, according to the RBI norms. The NBFC AFCs are distinct from all other non-banking entities,” said Raman Aggarwal, co-chairman of FIDC, here on Monday.

In fact, like MFIs, NBFCs also enjoy high margins in rural areas, though their model of lending is different from MFIs, which is group liability and weekly repayment model.

Several states have brought RBI-registered NBFCs under the ambit of respective legislations to protect borrowers from exploitation by lenders. The association has also sought exemption of NBFCs from these legislations.

Risk weightage for productive assets
The council also wants a revision of risk weightage for assets financed by NBFCs-AFCs. Under the present dispensation, the risk associated with all loans carry 100 per cent risk weightage.

In a representation to the RBI, the association has sought risk weightage for assets financed under commercial vehicles, cars and multi-utility vehicles to be reduced to 50 per cent, construction and material handling equipment and tractors to 50 per cent, loans against gold and silver jewellery up to Rs 1 lakh to 50 per cent, three-wheelers to 75 per cent, and two-wheelers and industrial equipment to 100 per cent.

The FIDC is also pushing for long-term funding through a separate fund for NBFCs in the AFC space through a separate window set up by the RBI.