RBI to consider giving Section-8 MFI firms' access to credit bureaus

The lack of access to credit information leaves Section-8 MFIs in the dark about the worthiness of their clients, while allowing borrowers to exploit the arbitrage between Section-8 and mainline MFIs

The Reserve Bank of India (RBI) is considering whether Section-8 companies or not-for-profit (NFP) entities involved in microfinance should get access to credit information companies (CICs).

 

Under the Credit Information Companies (Regulation) Act (2005), only RBI regulated entities (REs) are allowed to hook into CICs or credit bureaus – that is sharing data with and accessing it from them. This leaves out data flow to Section-8 microfinance institutions (MFIs) as only non-banking financial companies (NBFCs) dedicated to microfinance (NBFC-MFIs) are eligible.

 

A submission was also made to the banking regulator that Section-8 MFIs be allowed to convert to mainline NBFCs-MFIs. This, sources said, was a follow-up to the conference of chief executive officers of NFPs held in Bengaluru last month where the matter had been discussed.

 

These issues also figured in a recent interaction between RBI officials and Sa-dhan, the self-regulatory organisation MFIs. 

 

A fall-out of Section 8 MFIs not having access to credit bureaus is that they are blindsided due to the lack of visibility of their customers’ credit worthiness. Additionally, loans provided by them are not visible to the wider MFI ecosystem. This leads to defaults and higher customer indebtedness as lenders end up giving more loans to clients not deserving of it, credit-wise. This also affects banks which have funded Section-8 MFIs.

 

One of the issues discussed at the meeting between RBI and Sa-dhan was of customers taking advantage of the arbitrage available between Section-8 and mainline MFIs. This adds to defaults, and affects the priority sector loans given by banks to Section-8 entities.

 

Incidentally, Sa-Dhan has partnered with TransUnion Cibil - a CIC – to launch a dedicated credit awareness initiative. Designed to strengthen credit literacy and prudent lending practices within the MFI ecosystem, it will support lenders and micro finance borrowers. 

 

The RBI’s Financial Stability Report of June 2025 observed that the ratio of stressed assets in the microfinance sector increased in H2FY25, with 31-180 days-past-due (DPD) rising to 6.2 per cent in March 2025 from 4.3 per cent in September 2024. Banks also saw an increase in stress in their microfinance book with 31-180 DPD rising to 6.5 per cent from 4.7 per cent during this period.

 

In June this year, RBI deputy governor M Rajeshwar Rao noted “While microfinance has played an important role in financial inclusion, there are some issues which need attention. The sector continues to suffer from a vicious cycle of over-indebtedness, high interest rates and harsh recovery practices”. The frequency of disruptions in the microfinance sector has also increased of late. Incidents of high borrower indebtedness, coupled with coercive recovery practices, sometimes lead to tragic consequences. It is in the collective interest of all stakeholders that such disruptions are pre-emptively addressed and avoided, he noted. “In this regard, REs must also enhance their credit appraisal frameworks to prevent over-leveraging of borrowers”, he said.

 

*  Under the Credit Information Companies (Regulation) Act (2005), only RBI regulated entities (REs) are allowed to share and access data from and with credit bureaus

  *  This limits data flow to non-banking financial companies (NBFCs) dedicated to microfinance or NBFC-MFIs

  *  Submission to the banking regulator that Section-8 MFIs be allowed to convert to mainline NBFCs-MFIs

  *  The Financial Stability Report of June 2025 observed that the ratio of stressed assets in the microfinance sector increased in H2FY25