NBFC-MFI
Microfinance institutions or MFIs are those financial institutions that are in the business of providing loans and other financial services on a smaller scale. They are in the business of extending small loans in rural areas and among lower-income people in urban areas. Some of the large scale MFIs, after qualifying certain criteria and being non-deposit taking entities, register as Non-Banking Financial Company (NBFC) and get governed by RBI (Reserve Bank of India). These NBFC-MFIs are also termed as “Last Mile Financiers”. RBI governs them to keep these NBFC MFIs healthy and accountable. They are to apply for NBFC License with RBI to get registered with it.
According to provisions of RBI only non-deposit taking NBFCs can get registered as NBFC MFI after meeting the following conditions:
Minimum Net Owned Funds (NOF) of Rs. 5 crore. (For North Eastern States, Rs. 2 crore is required as minimum NOF).
At least 85% of its Total Net Assets must be “Qualifying Assets.”
An NBFC, not qualifying as an NBFC MFI, cannot extend loans in the micro-finance sector, of more than 10% of its total assets, in aggregate.
The only difference between an NBFC MFI and other types of NBFC is that while other NBFCs can operate at a very high level but MFIs can only cater to the lower level of social strata, who need microcredits.
Pre-Registration Conditions
NBFC MFI Registration Process
After your company has been established and the minimum NOF arranged, the below procedure needs to be followed to get the NBFC MFI License for your company:
Apply online with the required documents. A Company Application Reference Number (CARN) will get automatically generated. This reference number shall be used during all future enquiries and communications.
The hard copy of the documents and the application form as submitted online above are sent to the Regional Office of the RBI.
Upon verifying the submitted documents, the regional office sends them to the central office of the RBI. There, the application and the documents are examined and a thorough background check is conducted.
If RBI finds the company meeting all the terms and conditions specified in Section 45-I A of the RBI Act, it shall be granted the license to become an NBFC MFI.
Documents Required to Become NBFC MFI
Compliances to be Met After Registration
All incorporated NBFC-MFIs must maintain a capital adequacy ratio or CAR (including Tier-I and Tier-II capital) of at least 15% of its aggregate risk-weighted assets. The total of Tier-II capital, at any time, should not be more than 100% of Tier-I Capital.
Tier-I Capital
It is the capital that can absorb the losses without such an impact on the entity to cease trading,
Tier-2 Capital
The capital that can bear losses at the time of winding–up and so the depositor may not be completely protected.
Capital Adequacy Ratio Standards
- NBFCs to be classified as NBFC MFIs must maintain a minimum CRAR of 15%.
- The NBFC MFIs in the state of Andhra Pradesh (now Telangana & AP) having more than 25% loan portfolios are to maintain CRAR at 15%.
Asset Classification Norms
- Standard assets are those assets that assets which do not pose any problem nor bear risk more than normally attached to a business. And no default in repayment of principal or payment of interest is recognized, attached to it.
- Non-performing assets are assets for which, interest and/or principal payment has been overdue for 90 days or more.
Net & Qualifying Assets of NBFC MFI
Only the assets originated on or after January 1, 2012 will have to comply with the Qualifying Assets criteria. Those existing before this date are reckoned towards meeting both the Qualifying Assets as well as the Total Net Assets criteria. These assets have been allowed to run off on maturity and not be renewed.
“Net Assets” are total assets. Excluding cash, bank balances, and money market instruments.
“Qualifying Assets” are loans by an NBFC MFI, meeting below descriptions:
Loan disbursed to a borrower with a rural household annual income not more than Rs. 1,25,000 or urban & semi-urban household income not exceeding Rs. 2,00,000.
Loan amount shall not be more than Rs. 75,000 in the first cycle and Rs. 1,25,000 in subsequent cycles.
In total, not more than Rs.1,25,000 is to be lent to a borrower. Any loans taken to fulfill education and medical expenses shall be excluded while calculating the total indebtedness of a borrower.
For a loan of more than Rs. 30,000, the duration of the loan shall not be less than 24 months. With prepayment clause without penalty.
Loan offered without any collateral.
The repayment schedule to be chosen by the borrower, as either weekly, fortnightly or monthly instalments.
The aggregate amount of loans, given for income generation, not to be less than 50 % of the total loans given by the MFIs. And the balance amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or emergencies,
The income earned from the balance of 15% of the Qualifying Assets shall comply with the provisions provided specified for it.
Necessary Compliances
RBI decrees that every NBFC MFI has to become a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005. Present timely and correct data to the CICs and use the data with them to ensure compliance with the conditions concerning membership of JLG/SHG, level of indebtedness and origins of funds. Such membership will ensure compliance with most of these stipulations.
Channelizing Agents for Schemes operated by different Government Agencies
The department of channelizing agents is to be considered a separate business entity. Their loans shall not be included while determining the minimum qualifying assets criteria of 85%.
The interest on such loans is also not to be included while calculating the difference between the maximum and minimum interest rates.
The cost of these funds is also not to be counted while determining the average cost of funds or the interest rates charged to borrowers.
Proper accounts and records for such loans as well as funding from concerned agencies shall be kept by the NBFC MFI. Disclosed separately in the financial statements.
All these loans are to be reported to CICs to restrict multiple borrowings of a borrower.
The asset classification, provisioning norms, income recognition, and other prudential norms, applicable to NBFC MFIs, apply here as well. Except if the NBFC MFI does not bear any credit risk.
Provisioning Rules
Regulations About Loans & Funding
Pricing of Credit
The margin cap for all NBFCs, irrespective of their size, must not be more than 10% for large MFIs (having loan portfolios over Rs.100 crore) and 12% for the others.
The interest rates charged by an NBFC MFI on its loans extended must be the lower of:
- The cost of funds added with the margin (10% or 12% as mentioned above), or
- The average base rate of the 5 largest (by assets) commercial banks multiplied by 2.75 per annum. This rate is calculated and advised by RBI on the last working day of the previous quarter. And interest rates for the upcoming quarter are determined.
NBFC MFI will ensure that the average interest rate on loans during any financial year (FY) does not exceed the average borrowing cost during that FY plus the margin, as prescribed.
- Further, while the rate of interest on individual loans may be more than 26%, the maximum variation allowed between the minimum and maximum interest rate cannot be more than 4%, for individual loans.
- The average interest paid and charged by the MFI is to be calculated on average monthly balances of unpaid borrowings and loan portfolio respectively. The figures must be certified by Statutory Auditors, annually, and also disclosed in the Balance Sheet.
The interest rates charged by an NBFC MFI on its loans extended must be the lower of:
- The cost of funds added with the margin (10% or 12% as mentioned above), or
- The average base rate of the 5 largest (by assets) commercial banks multiplied by 2.75 per annum. This rate is calculated and advised by RBI on the last working day of the previous quarter. And interest rates for the upcoming quarter are determined.
The condition of maximum variation permitted does not apply to loans being provided from the funding received by NSFDC (National Scheduled Castes Finance & Development Corporation). Such loans are to be directly credited to the borrower’s accounts with banks.
Any borrowing from NSFDC must be excluded while calculating the average cost of funds for the company. Estimate the price of the general credit, excluding the beneficiaries targeted by NSFDC. Proper records of funds received or lent out from NSFDC are to be maintained and disclosed in the balance sheet of the NBFC MFI.
NBFC MFI is to inform the concerned Regional Office of RBI of its being appointed as a channel agent by NSFDC within 30 days of getting appointed.
Processing charges not to be more than 1% of the gross loan amount. These charges are not to be included in the margin cap or the interest cap.
NBFC MFI is to recover only the actual cost, but not administrative charges, of insurance for group, or livestock, life, health for borrower & spouse.