RBI's revised QA norms to boost compliance, broaden microfinance reach

Industry body says lowering QA threshold for NBFC-MFIs to 60% will improve compliance, enable diversification, and support long-term sector sustainability

The Reserve Bank of India’s (RBI’s) revised qualifying asset (QA) criteria will enhance compliance while empowering institutions to build a more balanced portfolio, the Microfinance Institutions Network (MFIN) said on Monday.

 

On Friday, the regulator relaxed the qualifying asset requirement for non-banking financial company-microfinance institutions (NBFC-MFIs) to 60 per cent of total assets, down from 75 per cent earlier. This means MFIs must now maintain 60 per cent of their assets in microfinance loans, instead of the earlier 75 per cent.

 

The decision will enable NBFC-MFIs to extend their reach to the “missing middle” — through products designed for clients transitioning to micro, small and medium enterprises (MSMEs), micro-housing, and related sectors, MFIN said. It added that the move would strengthen the sector’s long-term sustainability while keeping the core microfinance mission intact.

 

In a press release, MFIN said: “The revised 60 per cent qualifying asset requirement is expected to enhance compliance across NBFC-MFIs by addressing the systemic reasons behind earlier breaches, and empower institutions to build a more balanced portfolio.”

 

 

Over the past three years, MFIN has actively engaged with the RBI, advocating for a more realistic and balanced QA threshold that aligns with the policy objective of keeping NBFC-MFIs focused on microfinance, while also reducing the incidence of regulatory breaches.

 

“This regulatory change demonstrates the responsiveness of the RBI to the genuine demands of the industry,” said Alok Misra, CEO and Director of MFIN. “It will help NBFC-MFIs remain in regulatory compliance at all times, diversify to some extent, and yet retain focus on microfinance.”

 

This significant policy update is expected to ease compliance challenges and allow NBFC-MFIs to better serve microfinance clients while managing portfolio risks.

 

The QA norm was originally introduced in 2011 when the RBI created the NBFC-MFI category, setting the threshold at “not less than 85 per cent of its net assets,” with “net assets” defined as total assets excluding cash, bank balances, and money market instruments.

 

In March 2022, the RBI revised this to 75 per cent of total assets to offer flexibility and promote innovation in meeting evolving credit needs. However, the change inadvertently tightened the framework, leading to frequent breaches of the norm.