Notes on Micro-Finance Institution

CS Md. Tausif Warsi

According to International Labor Organization “Micro Finance is an economic development approach that involves providing financial services through institution to low income clients.

The meaning of “Finance” is management of money. Microfinance institutions (MFIs) typically offer a variety of loan products and, increasingly, savings services as well.

Microfinance can play an important role in making financial markets work for the poor. Access to financial services may help the poor to better manage risks and to smooth income and consumption over time, without having to resort to child labor.

An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956 or Section 8 of the Indian Companies Act, 2013.) with Minimum Net Owned Funds of Rs.5 crore (for NBFC-MFIs registered in the North Eastern Region of the country, it will be Rs. 2 crore) and having not less than 85% of its net assets as “qualifying assets”.

 “Net assets” are defined as total assets other than cash and bank balances and money market instruments.

“Qualifying Asset” shall mean a loan which satisfies following criteria:-

• Loan disbursed without collateral by an NBFC-MFI to a borrower with a household annual income not exceeding Rs. 1,00,000 (rural) or Rs. 1,60,000 (urban and semi-urban).
• Total indebtedness of the borrower does not exceeding Rs. 1,00,000 provided that loan, if any availed towards meeting education and medical expenses shall be excluded while arriving at the total indebtedness of borrower.
• Loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles.
• Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty.
• loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

Features of MFI:-

• MFI go to clients rather than Clients going to MFI(s)
• Small size of loan and make it easy for re-payment
• Generally, it is collateral free
• It is a tool for social change, specially for women.

Advantage of MFI:-

• Micro Finance is a powerful instrument for society. It helps the needy person to do business or generate income.
• MFI(s) trying to eliminate the poverty by providing loan for doing new business or funding to existing business.
• It generates employment in the country.
• It improves the quality of education in the society

Disadvantage of MFI:-

• More man power required
• Borrowers are mainly poor people and many of them are not educated and it may require a lot of tutoring.
• The deal is too small for lender and it requires more time and money for due diligence.
• As the Capital is low the profits is also low.
• Progress of MFI(s) depends on number of borrowers.
  

Fair Practices in Lending

Transparency in Interest rates

• There should be a standard form of loan agreement
• There shall be only three components in the pricing of the loan :-
  • Interest charge
  • Processing Charge
  • Insurance premium includes administrative charge
• No penalty charged on delay payment
• No requirement to collect any security/margin from the borrower
• Every NBFC-MFI should provide to the borrower a loan card reflecting:-
  • Effective rate of interest charged
  • Information which adequate identifies the borrower
  • Information which identifies the borrower
  • Acknowledgement by the NBFC-MFI of all repayment including installments received and the final discharge.
  • All entries in the Loan Card should be in the vernacular language.

Statutory Auditors Certificate

In terms of paragraph 15 of the Non Banking Financial (Non-Deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 all NBFCs are required to submit Statutory Auditors Certificate with reference to the position of the Company as at end of the financial year ended 31^st March every year.

Geographical Diversification

NBFC-MFIs may approach their Board for fixing internal exposure limits to avoid any undesirable concentration in specific geographical locations.

Formation of SRO

The Malegam Committee has recommended greater responsibility to be placed on industry associations for monitoring of regulatory compliance. All NBFC-MFIs are encouraged to become member of atleast one Self Regulatory Organization (SRO) which is recognized by the Reserve Bank of India and will also have to comply with the Code of Conduct prescribe by the SRO.

Monitoring of Compliance

The responsibility for compliance to all regulations prescribes for MFIs lies primarily with the NBFC-MFIs themselves. The industry associations/SROs will also play a key role in ensuing with the regulatory framework.