NBFC-MFI: RBI's New Guidelines

Reference

The Reserve Bank of India (RBI) on June 6 reduced the qualifying asset limit for non-banking financial company-microfinance institution (NBFC-MFI) from 75% to 60%.

About Non-Banking Financial Company-Microfinance Institution (NBFC-MFI)

• Introduction: These are financial institutions that are registered as non-banking finance companies (NBFCs) and mainly provide microfinance services.
• Objective: To provide microcredit to those who do not have access to traditional banking services, such as low-income groups, people in rural areas, small entrepreneurs and economically weaker sections.
• Examples: Institutions like CreditAccess Grameen Ltd., Ujjivan Small Finance Bank and Bandhan Bank are prominent in this space.

Key Features

• Collateral-free loans: These institutions offer small loans without any guarantee or assets. As per RBI guidelines, these loans are given to families with annual household income up to ₹3 lakh.
• Target group: They mainly target economically disadvantaged sections of the society, such as women, small farmers and self-employed.
• Financial inclusion: These institutions promote financial inclusion, giving weaker sections of the society access to financial services that help improve their economic condition.
• RBI regulation: They operate under strict RBI guidelines.

Change in qualifying asset limit

• RBI regulation: These institutions operate under strict RBI guidelines. has reduced the qualifying asset limit for NBFC-MFIs from 75% to 60% of total assets (less intangible assets).
• This change is aimed at allowing these institutions to diversify their asset base.
• Now these institutions will have to invest a minimum of 60% of their total assets in microfinance loans and ensure this compliance on an ongoing basis.
• If an NBFC-MFI fails to maintain this limit for four consecutive quarters, it will have to approach the RBI with a correction plan.
• This rule makes these institutions accountable for regulatory compliance and provides them operational flexibility. 

Definition of Microfinance Loan

• Microfinance loan is defined as a collateral-free loan extended to families with an annual household income of up to ₹3 lakh.
• Family in this context means husband, wife and their unmarried children. This definition ensures that the benefits of microfinance truly reach the economically weaker sections.

Impact of Policy Change

• Reduction in qualifying asset limit will enable NBFC-MFIs to diversify their operations rapidly.
• Diversification in asset base will enable these institutions to launch new financial products and services thereby increasing their income sources.
• This change will promote balance sheet stability and help these institutions to ensure robust income across the ups and downs of economic cycles.
• This change will also help improve risk management as the impact of economic volatility can be mitigated by reduced reliance on microfinance loans.
• However, this flexibility also comes with compliance challenges. NBFC-MFIs will have to ensure that they continue to maintain the minimum 60% qualifying asset limit.
• This will require strong monitoring and management systems.