Microfinance - Harmonisation of MFI regulation; NBFC-MFIs stand to be key beneficiaries

The RBI, in order to streamline the MFI regulatory framework and create a level playing field for all entities (irrespective of category), has issued a uniform MFI regulation - Regulatory Framework for Microfinance Loans Directions, 2022. We believe a harmonised regulatory regime will create a level playing field for all incumbents, improve borrower-level credit bureau data, and provide credit to small borrowers in most transparent manner. While the new regulation is targeted more towards bringing different categories of lender (NBFC-MFIs, banks, SFBs, etc.) under one regulatory umbrella, NBFC-MFIs stand to gain the most. Key takeaways for NBFC-MFIs are: i) expanded target market: revised household income to Rs300,000 from Rs125,000 in rural, and Rs200,000 in urban segments, would expand customer reach for NBFC-MFIs; ii) shift to risk-based pricing from formula-based pricing; and iii) scope to diversify AUM towards secured assets. Prefer CreditAccess Grameen in the NBFC-MFI segment.

• Expanded addressable target market for NBFC-MFIs. The RBI, in its revised MFI framework, has advised all entities to adopt a uniform definition of MFI loan based on revised (higher) household (HH) income with aggregate exposure limit capped at 50% of monthly HH income. The revised HH income at Rs300,000 expands the addressable market for NBFC-MFIs. Earlier, their addressable market was restricted to households with annual income of
• Total indebtedness linked to household-level 'debt to income' ratio. Taking cognisance of the changing landscape of MFI industry and applicability of extant regulations only to ~34% (NBFC-MFIs) of the industry, the RBI proposes to link the total household indebtedness at maximum 50% of the monthly household income, applicable to all regulated entities. Thereby, it removes the earlier borrower-level ticket-size cap of Rs125,000 (which was applicable only to NBFC-MFIs). Further, by restricting borrower-level indebtedness at a 'debt to income' ratio of 50%, the RBI has also removed the criteria of maximum two NBFC-MFIs per borrower.
• Pricing of credit: Risk & Fair-practice based approach has been proposed. Existing guidelines on MFI loan pricing (applicable only to NBFC-MFIs) were linked to: i) a margin cap of 12% for smaller MFIs (loan portfolio
• Scope to diversify AUM mix. Under the earlier regulatory regime, NBFC MFIs were required to maintain a minimum of 85% of their total assets as qualifying assets (mainly MFI loans). While modifying the MFI loan definition (linked to HH income), the RBI has now revised the minimum requirement of qualifying assets to 75% from 85% earlier. This move will enable NBFC-MFIs to build secured retail assets and diversify risk and AUM mix going ahead.
• Our view. 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 cost more effectively than earlier. While, we believe, the impact of the revised regulation on SFBs and banks are neutral to positive, NBFC-MFIs stand to benefit the most. Prefer CreditAccess Grameen in the NBFC-MFI segment.

Source : Equity Bulls

Keywords

Microfinance MFI SectorReport ICICISecurities CreditAccessGrameen NBFCMFI