Published on 8/10/2019 11:15:14 AM | Source: ICICI Securities Ltd

NBFC Sector - Microlenders to follow ‘Code for Responsible Lending’ By ICICI Securities

Posted in Broking Firm Views - Sector Report| #NBFC #Sector Report #ICICI Securities

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Microlenders to follow ‘Code for Responsible Lending’

As per several media reports, Sa-Dhan (self-regulatory organisation and industry association for the microfinance industry) in its Annual National Conference unveiled the ‘Code for Responsible Lending’ (CRL) for all micro lenders. Notably, two other major SROs namely Microfinance Institutions Network (MFIN) and Finance Industry Development Council (FIDC) also joined hands with Sa-Dhan in implementing CRL. As per media reports, more than 90 entities, including NBFCMFIs, banks, NBFCs, SFBs etc have signed up for the CRL as ‘responsible lenders’. New code capped number of lenders (including all and not only NBFCMFIs) per client to three maximum and no lending without update credit bureau. We prefer players with higher share of new-to-credit customers like CAGL.


*  Code for Responsible Lending –

CRL mandates signing member to follow the norms prescribed in new code which includes

a) maximum three lenders (including all NBFC-MFIs, NBFCs, Banks, SFBs etc) per client,

b) no lending without update credit bureau report,

c) maximum loan limit of Rs1 lakh per borrower and

d) no lending to NPA borrowers. We believe the code is largely aimed at keeping a tight check on borrower’s leverage and if followed in true spirit, it would improve the quality of incremental loan assets.


*  CRL – brings everyone under one umbrella.

First time, majority micro-lenders have come together and agreed to follow the norms drafted by self-regulatory organisations. What is more encouraging is despite being voluntary in nature, almost 90 entities (total 192 entities as per March’19 Mfin report) have signed CRL agreement. Currently, a diverse set of lenders such as NBFC-MFIs, NBFCs, banks, SFBs and non-profit/section 8 MFIs - under different regulatory framework, extend micro loans to over 90mn women borrowers from low-income households.


*  Maximum three lenders per client.

Maximum lenders cap has been revised after almost a gap of 8 years, in Dec’11, RBI-mandated maximum two NBFC-MFIs per borrower. Over the years, banks, NBFCs and SFBs (converted from NBFC-MFIs) have entered this space but they were not regulated under NBFC-MFI guidelines and hence, maximum two NBFC-MFI cap per borrower was not applicable to them. Hence, we believe, introduction of ‘Code for Responsible Lending’ covering everyone under one umbrella was the need of the hour considering different players catering to same space regulated by different framework.


*  CRL, if followed in true spirit, would improve quality of loan assets going forward.

By restricting, a maximum number of lenders to three per borrower would most likely force incumbents to target new-to-credit customers rather than extending a higher loan to currently served customers and at the same time three-lender cap would restrict excessive competition in currently highly penetrated districts. Currently, 210 districts (~29% of total number of districts in India) constitute 80% of the portfolio outstanding, as per the latest industry report. Incrementally, lenders would try to enter vacant geography or under-served districts than entering geography where already three-four players are operating.


* No clarity on penalty for non-adherence.

We did not find any information on penalty for non-adherence and the same is creating question mark on the successful implementation of CRL at ground level.


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