Microfinance body MFIN tightens underwriting guidelines for members

The microfinance industry's self-regulatory body MFIN on Tuesday announced that it has tightened loan underwriting guidelines for its members amid concerns about over-indebtedness among the borrowers.

Micro Finance Industry Network (MFIN) said the revised guidelines take care of current challenges in lending, wherein a lender does not get data on monthly outflows from a household on account of previous loans or even the 'bullet repayments' wherein money is paid at the end of a loan period.

Microlenders are carrying out varying practices at present, and hence, MFIN has issued the guidelines to ensure "uniformity in the treatment", and help lenders to have a robust underwriting policy dealing with cases of bullet repayments/missing EMIs.

The body, however, did not elaborate on the exact steps undertaken.

It can be noted that there have been concerns around over-indebtedness among MFI borrowers, wherein a single borrower has been given over five loans in many cases.

Some of the industry participants have already said that as the practices get tightened, there will be stress on asset quality and also loan growth, which they will experience in the short term. Analysts also flag events like state elections, which led to the deterioration of credit culture in the past.

The MFIN statement issued on Tuesday explained that RBI's current regulations mandate an accurate estimation of the outflows on account of repayment of monthly loan obligations of the borrower household, and stipulate that the monthly repayment obligations should not exceed 50 per cent of the monthly household income.

Lenders depend on credit reports generated from credit information companies for estimating the outflow from a household, but an accurate estimation faces the hurdles noted earlier.

The EMI value for a particular loan is often not reflected in the credit report in the case of consumer or retail loans because submission of EMI data by the lenders to the credit bureaus is not mandatory, MFIN said.

Similarly, in cases of bullet repayments in loans like gold loans or Kisan credit cards, the value does not get captured because this is not a monthly outflow, it added.

The new guidelines have been issued after stakeholder conversations for over six months and analysing 12 crore loan records, the SRO said.