The microfinance industry is unlikely to experience the pre-pandemic recovery efficiency levels of nearly 99% as the entire microfinance lending landscape in India has undergone a transformation. Recovery levels are expected to be around 96-99% for the industry as a whole, said Jiji Mammen, managing director and CEO of Sa-dhan.
The collection efficiency of MFIs, which had seen a significant decline in early 2020 as a result of the Covid-induced lockdown and the general downturn in the economy, has seen steady improvement over the past two years.
“The recovery rate has improved. For all new loans issued after the recent Omicron wave, the recovery rate is close to 100%. But loans issued during the second wave suffered and because of this overall recovery, fell to 95-96% Although it may go up a little [moving forward], it may not be possible to reach the 99% levels. It is likely to settle between 96 and 99 percent,” Mammen said. Activity area.
SROs will play a development role
According to him, self-regulatory organizations (SROs) such as Sa-dhan need to transform and play more of a developmental role in the context of recent changes in the regulatory landscape.
The Reserve Bank of India had recently issued its final guidelines for MFIs, which would apply to all entities including banks, small financial banks and NBFCs operating in the sector.
Under the revised guidelines, Regulated Entities (REs) that lend to the microfinance segment will need to ensure that loans are unsecured and not tied to a lien on the borrower’s deposit account, that repayment obligations are capped and interest rates are not usurious, and there is no prepayment penalty.
The central bank has set a common household limit of ₹3 lakh for loans to qualify as microfinance, unlike the earlier definition which distinguished between rural and urban households.
The maximum possible indebtedness per borrower has been increased to ₹2.4 lakh (from half of what it was before). It also removed margin caps specifically applicable to NBFC-MFIs.
“The new regulatory framework is a milestone and a laudable step on the part of the regulator. While this gives a lot of freedom to entities (in terms of setting interest rates and designing products), it also requires a lot of accountability from lenders and their boards,” he said. he declares.
Interest rates can now be decided based on board policy. Although the board has been given the freedom to set interest rates, SROs can monitor and help ensure that they are not usurious. Apart from that, Sa-dhan is also working on developing a framework on risk management tools.
June 26, 2022