scorecard1 in 2 micro loans are being rejected since April, thanks to RBI's new microfinance framework
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1 in 2 micro loans are being rejected since April, thanks to RBI's new microfinance framework

1 in 2 micro loans are being rejected since April, thanks to RBI's new microfinance framework
Finance3 min read
Customers in a queue to withdraw their money during nationwide lockdown    BCCL
  • RBI’s new microfinance framework has had a major adverse impact on new microfinance loans.
  • Earlier banks used to reject three out of ten — or about 30-35% — such microfinance applications.
  • A microfinance loan is defined as a collateral-free loan given to a household having an annual income of up to ₹300,000.
  • The microfinance disbursement is expected to be muted for the April-June quarter, even though there may be recovery in June.
One out of every two applications for small loans have been rejected ever since the Indian central bank implemented revised guidelines for microfinance loans in April 2022, a latest report by ICICI Securities has revealed.

The brokerage firm noted that earlier banks used to reject three out of ten — or about 30-35% — such applications. But the revised guidelines under the ‘Regulatory Framework for Microfinance Loans Directions 2022’ have made it even harder for customers to get small loans, leading to an increase in rejection rate.

“Our channel checks suggest that, post the implementation of revised guidelines w.e.f. 1st April, 2022, as per the ‘Regulatory Framework for Microfinance Loans Directions 2022’, microfinance loan rejection rate increased to over 50% vs 30-35% pre-March 2022,” ICICI Securities said in a report published on June 9.

A microfinance loan is defined as a collateral-free loan given to a household having an annual income of up to ₹300,000.

What has led to such micro loan rejection?



ICICI Securities — a subsidiary of ICICI Bank — has blamed this muted growth on two main factors of the revised guidelines.

First, the maximum loan per borrower has been capped at an ‘EMI to income ratio’ of 50% with an annual household income at ₹300,000, which has left out many loan seekers. Previously the household income was kept at ₹200,000 in urban areas and ₹160,000 in rural areas.

Secondly, the lender has to consider all outstanding retail loans at household level — and not only at microfinance institutions borrower level — while arriving at monthly EMI, which has increased the timeline of customer onboarding process. These provisions are applicable on all commercial banks, all co-operative banks and all non-banking financial companies (NBFCs).

“Our interaction with field staff and branch managers suggests that centre timings have increased to capture details of all household members vs only borrower-level data earlier. The same is likely to impact productivity in the near term,” the report noted.

But it's not all bad, June may be better



According to data shared by MFIN, the microfinance loan portfolio of all lenders grew about 10% year-on-year to ₹2.56 lakh crore at the end of December 2021, compared to ₹2.33 lakh crore in the previous year.

The ICICI Securities’ report also noted that the gradual increase in economic activities and steady improvement in collections led to robust microloan disbursements in the second half of fiscal year 2022.

But the momentum was derailed due to the new microfinance loan directions.

Even though the microfinance disbursement rate will be back to pre-Covid levels in June, it would not be enough to increase overall loan disbursal in the April-June quarter. Therefore, microfinance disbursement is expected to be muted this quarter.

“The new regulatory regime will create a level playing field for all incumbents and the risk-based pricing approach is likely to enable the players to absorb cyclical lumpy credit costs more effectively than before. While, we believe, the impact of the revised regulation on SFBs and banks will vary from neutral to positive, NBFC-MFIs stand to benefit the most,” ICICI Securities concluded.

The revised guidelines were also welcomed by other microfinance firms like Microfinance Institutions Network (MFIN), Village Financial Services and Ba-Dhan for similar reasons.

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