After RBI strictures, MFIs tighten norms to make lending more responsible

After repeated strictures from the Reserve Bank on the industry's practices, the Microfinance Institutions Network (MFIN) on Monday announced a slew of changes to make lending to the bottom of the pyramid more "responsible".

From January 1, the self-regulatory organisation's members will ensure that a single MFI client's borrowings are limited to three MFIs as against four at present and the total indebtedness of a borrower including MFI and unsecured retail loans is capped at Rs 2 lakh, a statement said.

The body's chief executive and director Alok Misra hoped that the sector will become "more resilient" with the new measures.

Over the last few months, the RBI has gone public with its concerns on a slew of practices adopted by the MFIs, including usurious high interest rates, multiple lendings to single borrowers and even practices like not crediting loan repayments to the rightful accounts despite being paid by borrowers.

On October 21, the RBI also asked four entities including Navi Finserv, DMI Finance, Arohan Financial Services and Asirvad Micro Finance to cease and desist from sanctioning and disbursing new loans because of unfair practices.

At the same time, many lenders are showing a rise in their NPAs in the MFI segment.

Microlenders have also tightened the norms on lending to a client who has slipped into the non-performing asset category, as per the MFIN guidelines.

No lending will be made to a delinquent client who has not repaid an outstanding of over Rs 3,000 for over 60 days as against 90 days at present, the guidelines for MFIN members state.

The SRO has also asked lenders to levy no other charges from a loan account apart from processing fee and credit life insurance.

Interest rates will be "closely reviewed" by the boards of the regulated entities to ensure that efficiency gains are passed on to clients, the MFIN statement said.

With an eye on improving underwriting standards, the sector has set a target to seed PAN for 50 per cent of borrower accounts by March 2025, the statement said, adding that validated voter ID will continue to be the primary ID.

"These measures pertain to facilitating responsible lending, prioritizing customer protection and promoting a steady and calibrated growth of the sector," it said.