Banking Technology Insights - Changes in Microfinance Lending

1️⃣ Featured Insight - Changes in Microfinance Lending

MFIN (Microfinance Institutions Network) is a Self-Regulatory Organization (SRO) for the microfinance industry in India. It primarily represents NBFC-MFIs (Non-Banking Financial Company - Microfinance Institutions) and works to ensure responsible lending practices, regulatory compliance, and industry growth. MFIN collaborates with the Reserve Bank of India (RBI) and other stakeholders to maintain transparency and protect borrower interests in the microfinance sector. Typically, all institutions involved in microfinance lending, follow these guidelines. MFIN has released new guidelines as of January 2025. Here, is all you need to know about the guidelines.

💡What are Microfinance loans?

• Microfinance loans are uncollateralized loans which are given to households with annual income up to 3 lakhs.

• To ensure accuracy of the same, microfinance lenders are required to submit the same to credit information companies every month.

• The income is used to ensure that the total obligations for the customer do not exceed 50% of their income. This includes all loans, not just microfinance loans.

• To estimate the monthly obligations, for non EMI products, specific multipliers are given, 1-1.5% for gold loans, 5% for credit cards, 1% for kisan credit cards.

• For the rest of loan types, by loan amount bucket, the minimum EMI estimations are recommended by MFIN.

💡Bureau reporting of microfinance loans.

• UCRF based credit reporting is a must.

• The primary method of KYC must be voter id card. All KYC information should be picked from voter id card, post verification from election commission.

• Weekly submission for account status changes, new loans disbursed, account closures, account number changes. Ideally, this should be done daily.

• Monthly submission for the full data in the UCRF format.

• New loans must be disbursed within 15 days of the credit report getting pulled.

💡Cross selling products

• Only life insurance can be bundled along with the loan product.

• If there is a demise of the borrower during the loan, then only the outstanding loan amount goes to the lender, rest of the amount must go to the family members / nominee.

• Any other cross selling of other products, can only be done after one month of disbursement of the loan.

• Even the processing fees should not exceed 1.5% of the loan amount. 

• APR must include interest rate, processing fees and life insurance only, no other charge can be deducted at time of disbursement.

💡Underwriting guidelines

• The maximum number of possible MFI lenders has been reduced from 4 to 3. This is effective from April 2025.

• The maximum indebtedness, including the proposed loan, of the borrower should not exceed 2 lakh rupees. This includes both microfinance loans and unsecured retail loans. Earlier the limit was only on microfinance loans, and not on unsecured retail loans.

• Any customer having a DPD of more than 60 days (earlier this limit was 90 days), with an outstanding balance more than 3000 should be rejected.

• With these new guidelines, expect that the MFI portfolio of the country will improve in credit quality, while this may cause a slowdown in the sector in the short term.

2️⃣ Industry News Roundup

🗓️ Spinny raises $131 million to expand NBFC arm. [Reference]

🗓️ Bank credit growth has been slowing down, and is down to 12% from a peak of ~17% [Reference]

3️⃣ Stats of the week

📊Loan against gold jewellery and loan for renewable energy are the biggest sub sectors which are showing the maximum growth in the lending sector. Loan against gold jewellery grew by 87% year over year, while loan for renewable energy grew by 45%.