Harmonisation guidelines proposed by the Reserve Bank of India (RBI) for non-banking finance companies and microfinance institutions (NBFCs-MFIs) are need of the hour to address diverse interpretations of regulations by multiple forms of entities, India Ratings and Research (Ind-Ra) has said.
The RBI's recent consultative document on regulation of microfinance proposes to include a common definition of microfinance loans applicable to all regulated entities.
In addition, it tries to achieve a common process to arrive at the maximum permissible borrower indebtedness by doing away with the cap on the number of lenders per borrower and pricing caps.
Ind-Ra said the proposals have potential to create a level playing field for NBFCs-MFIs while also providing mid and small sized MFIs with the ability to lend profitably.
The current lending caps make balance sheet lending challenging as some of them have borrowing costs from 13 to 15 per cent which leaves little space for operating costs and possible credit costs.
Most non-NBFC MFIs are not following the RBI price caps for NBFC-MFIs, said Ind-Ra. The proposed harmonisation guidelines can be a positive for NBFC-MFIs in this regard.
From the borrowers' point of view, this can result in increased cost of credit. Nevertheless, this borrower segment's demand and performance are reasonably inelastic to pricing range as it exists now which is 19 to 25 per cent.
However, the proposed regulations do not address the needs of MFI trusts as they are not regulated. They also do not address their needs to freely access credit bureaus and submit borrower data to the bureau, said Ind-Ra.
( With inputs from ANI )
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