MFIN to review compliance of its members with norms on indebtedness

Stock-taking in November to include cap on number of lenders per borrower

Microfinance Industry Network (MFIN), the self-regulatory organisation for the microfinance sector, will review the compliance of its members with norms that restrict the number of lenders per borrower to four, and limit total microfinance indebtedness to Rs 2 lakh.

This exercise will be conducted in November 2024.

Alok Misra, chief executive and director, told Business Standard that MFIN would carry out a review of compliance with these guardrails based on data sourced from Credit Information Companies. The review will cover the July-September period.

At present, lenders adhere to the Reserve Bank of India’s (RBI) regulations, which cap the ratio of loan repayment obligations to income at 50 per cent.

In July 2024, MFIN members agreed to introduce additional guardrails to strengthen processes and enhance borrower protection.

With nearly 80 per cent of loans having a tenure of 1.5 years or more, a limit of Rs 2 lakh results in a much lower repayment obligation than the permissible regulatory limit, MFIN had noted.

The portfolio quality (portfolio at risk between 30 to 180 days) of micro-loans deteriorated from 1.80 per cent at the end of June 2023 to 2.69 per cent in June 2024. A prolonged heatwave and external factors, such as campaigns urging borrowers not to repay loans, impacted the portfolio quality, the self-regulatory organisation (SRO) said.

Meanwhile, MFIN has issued guidelines on bullet repayments and missing equated monthly instalments (EMIs) for lenders to enable accurate assessment of the monthly repayment obligations of borrowers.

There are varying practices followed by lenders to address these issues. These guidelines are expected to bring uniformity in the treatment of such cases and help lenders comply with RBI regulations.

These guidelines have been developed after extensive interaction with stakeholders over 6–8 months. More than 120 million loan records were analysed in collaboration with a credit bureau for this purpose, Misra said.

Lenders use credit bureau reports to estimate outflows related to loan repayments. Accurate estimation of these outflows faces two hurdles.

Firstly, the EMI value for a particular loan is often not mentioned in the credit report. This is common in consumer or retail loans since submission of EMI data by lenders to credit bureaus is not mandatory for such loans.

Secondly, when loans are paid through a single ‘bullet repayment’ at the end of the tenure, there is no ‘monthly outflow’ value in the report, MFIN noted.