FinMin meet: MFI representatives seek lowering of asset qualification norms

In 2022, the RBI updated regulations for MFIs, which now apply to all entities in the sector, including banks, small finance banks, and non-banking financial companies (NBFCs)

Representatives of microfinance institutions (MFIs) on Wednesday raised concerns with Ministry of Finance officials regarding the Reserve Bank of India’s (RBI’s) regulations on asset qualification norms, which have been increased from 75 per cent to 85 per cent of total assets.

 

MFIs highlighted the need to revisit the norms. “We requested the government to address this issue in the upcoming Budget,” said Jiji Mammen, executive director and chief executive officer of Sa-Dhan, who was part of the meeting.

 

In 2022, the RBI issued updated regulations for MFIs, which now apply to all types of entities in this sector, including banks, small finance banks (SFBs), and non-banking financial companies (NBFCs).

 

Under the revised guidelines, the RBI eliminated the distinction between rural and urban areas. It set a uniform household loan limit of Rs 3 lakh for microfinance loans. Also, to qualify for an NBFC-MFI licence, institutions must allocate at least 75 per cent of their assets to microfinance activities. The threshold for NBFCs has also been raised to 25 per cent of their assets, up from the previous limit of 10 per cent.

 

Lowering the qualifying threshold will help reduce the concentration risk for MFIs, where a disproportionate amount of assets is tied up in one unsecured business, and will help diversify their portfolios. This will also enable them to lend higher amounts to mature clients with a proven track record.

 

The meeting was chaired by the Department of Financial Services (DFS) Secretary M Nagaraju. Attendees included representatives from NBFCs and MFIs, along with senior finance ministry officials.

 

During the meeting, various issues concerning MFIs were discussed.

 

“MFIs emphasised the need for a dedicated funding mechanism to support their operations, as obtaining loans from banks has become increasingly challenging for midsized and smaller institutions. They specifically requested a credit guarantee mechanism to facilitate easier borrowing, as well as an equity funding mechanism to support smaller MFIs,” said another MFI executive who was part of the meeting.

 

Moreover, MFIs are advocating for a goods and services tax (GST) waiver on co-lending activities, citing that such a measure would considerably aid their financial sustainability and growth.

 

“On the matter of GST, DFS has told us that the Department of Revenue is looking into this issue,” said the MFI executive.

 

The source further added that the current rating system for MFIs is quite stringent, which prevents smaller MFIs from obtaining funding.

 

Weeks before the Union Budget for 2025-26, DFS Secretary Nagaraju is holding a number of meetings with banks and allied sectors. On January 7, he chaired a meeting with the financial technology sector, and another meeting with public sector banks is scheduled for January 15.

 

“MFIs have also requested a dedicated fund for the northeastern region in the upcoming Union Budget,” said the source.

 

Credit to the microfinance sector by banks (including SFBs), NBFC-MFIs, and other NBFCs has decelerated during the current financial year (2024-25/FY25) so far, after witnessing rapid growth during the past three years, according to a latest report by the RBI.

 

“The microfinance sector is showing signs of stress, with rising delinquencies across all types of lenders and ticket sizes. During the first half of FY25, the share of stressed assets increased, with 31-180 days past due, rising from 2.15 per cent in March 2024 to 4.3 per cent in September 2024," said the RBI’s Financial Stability Report released last month.