RBI raises borrowing limit of MFI clients

The Reserve Bank of India (RBI) on Tuesday allowed microfinance institutions (MFIs) to increase the cap on the borrowing limit of their clients by Rs 50,000 to Rs 1 lakh. With this relaxation - one of the long-standing demands of MFIs - an individual borrower can now take loans up to Rs 1 lakh from two MFIs at the most.

RBI also raised the annual household income limit of rural borrowers to be eligible to take loans from MFIs to Rs 1 lakh from Rs 60,000 earlier. In case of urban and semi-urban household, the income limit has been raised from Rs 1.2 lakh to Rs 1.6 lakh. MFIs, in the first cycle of loan, can disburse up to Rs 60,000 against Rs 35,000 earlier.

The MFI sector expects more relaxations in the days ahead.

Following RBI's policy statement, SKS Microfinance's stock price rose 8.6 per cent on a day when the benchmark indices fell.

"In October 2014, the MFIN (Microfinance Institutions Network) had written to RBI for a number of changes in the regulations governing lending by MFIs. One of the requests was to increase the cap on loan and the income requirements. We are glad RBI has broadly accepted our recommendations," said Alok Prasad, chief executive of MFIN.

Another demand of the MFI sector was to reduce the quantum of qualifying assets for MFI loans from 85 per cent to 70 per cent. At present, MFIs can lend 15 per cent of their total assets outside the guidelines governing MFI lending, which includes income and loan cap criteria among others. However, the loans do not qualify as priority sector lending. The MFIs want the limit for non-MFI lending to be increased to 30 per cent.

"We expect more clarity in the detailed circular regarding today's (Tuesday's) announcements. The limit of qualifying assets should be kept at 70 per cent to give the MFIs more flexibility to lend at the individual level," said Samit Ghosh, founder of Ujjivan Financial Services.

This apart, MFIs want the cap on rural income levels to be eligible for an MFI loan to be pegged at not less than Rs 2 lakh.

"The borrowers' income levels set by RBI for MFI lending are still on lower side. To ensure that MFIs coverage can be further expanded it would be desirable to peg income levels at over Rs 2 lakh," said Prasad.

This apart, the MFIs are hopeful that with the launch of the proposed Mudra Bank.

“The target segments of the proposed Mudra Bank are  micro entrepreneurs, who credit requirement are in the range of Rs 50,000 to Rs 15 lakh. This category of borrowers are at present almost entirely unfunded by commercial banks. The MFIs are well poised to be able to deal with the funding requirements of this segment,” said Prasad.

According to P N Vasudevan, founder and managing director of Equitas, the change in regulations would not immediately result in a spike in MFI portfolio. Instead, it would help the MFIs expand their client base and gradually encompass slightly higher income group individuals in the MFI client segment, he added.

However, according to Vijay Mahajan, founder, BASIX, the MFI portfolio should expand by at least 60 per cent this financial year due to the relaxations. As on March 31, 2015, the loan outstanding in the MFI sector was Rs 35,000, a growth of nearly 40 per cent over the last year.

“One of the most commonly sought livelihoods in rural areas is dairying or opening a kirana shop. Both of these ventures cost in excess of Rs 50,000,” said Mahajan.

At present, the average ticket size of an MFI loan is between Rs 18,000 and Rs 25,000. “Enhancement in the disbursement in the first cycle to Rs 60,000 would reduce the transaction cost to MFIs and also micro entrepreneurs would be benefited with single trance disbursement of the said amount,” said Udaia Kumar, founder, Share Microfin.

RBI will come out with detailed guidelines of the proposed changes soon.