Borrowers may exploit loophole as eight MFIs transition to small banks in India

Monday, December 5, 2016

The transition of eight microfinance institutions (MFIs) to small finance banks has opened a new source of loans for their customers and potential worries on their repayment capacity.

This is because Reserve Bank of India (RBI) prohibits micro lenders from lending to customers who already have borrowed from two MFIs. However, with some of these MFIs becoming small finance banks, the same customers could tap other MFIs for loans.

According to RBI guidelines issued in July 2015, more than two MFIs cannot give loan to the same borrower at the same time and the total loan amount from the two MFIs should not exceed Rs60,000 in the first cycle and Rs1 lakh in subsequent cycles. Seven microfinance institutions are in the process of changing into small finance banks, and Equitas Small Finance Bank has already started operations.

According to data available with the Microfinance Institutions Network (MFIN) for the first quarter, the eight micro finance companies that will become small finance banks by March 2017 account for 40.50%, or 14.5 million, of the 35.8 million customers of MFIs.

Source: LiveMint (link opens in a new window)

Impact Assessment
financial inclusion, microfinance