Avoid extra loans to borrowers with over Rs 200,000 MFI exposure

Sa-dhan, industry organisation for the microfinance sector, has advised Micro finance institutions (MFIs) to refrain from giving additional loans to households with micro finance exposure beyond Rs two lakh to avoid over leveraging.

Also, lenders should not extend additional loans to clients who are non-performing assets (NPA) with outstanding amount in excess of Rs 3,000 to reduce chances of further pushing the borrower in the debt trap. Efforts should be made to reduce delinquency to 30 plus days past due (dpd) over time to improve clients' financial status, JiJi Mammen, Executive Director & Chief Executive, Sa-Dhan said in communication to members.

Sa-Dhan in a statement said an industry-wide meeting of the CEOs /managing directors of its member lending institutions was held on July 23, 2024 at Bengaluru, Karnataka. The enhanced guidelines must be issued to lending institutions to protect the interests of the microfinance sector and specifically its clients. The three key issues need to be addressed are Over-indebtedness, Pricing and Discipline.  These additional norms should be followed from September 01, 2024.

MFI body said processing fee to be capped at 1.5 per cent, excluding applicable taxes. Lending Institutions should follow transparent practices when pricing loans. Components of the rate of interest like Cost of funds, Opex cost, Risk Margin etc should be well defined and in compliance with guidelines, it added.

Sa-Dhan said the end use of loans is to be verified to ensure proper utilisation of loans for the requested purpose. Every microfinance loan should mandatorily go through a comprehensive credit bureau check at the household level.

A Credit Bureau report for the client and spouse / co-applicant is also mandatory to check on retail and microfinance loan obligations, he said.