FAQs on Non Banking Financial Company – Micro Finance Institutions

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Non Banking Financial Company – Micro Finance Institutions (NBFC-MFIs)
(Updated as on October 14, 2015)

Q1. What is an NBFC-MFI?

Ans. 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) 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”.

Q2. What are the documents required for registration as NBFC-MFI?

Ans. The checklist with respect to application for seeking Certificate of Registration from the Reserve Bank have been uploaded in the RBI website www.rbi.org.in → Sitemap → NBFC List → Forms/ Returns → Documents required for registration of NBFC-MFI – New Companies and Documents required for registration of NBFC-MFI (Existing NBFCs). Checklists mentioned are indicative and not exhaustive. Bank can, if necessary, call for any further documents to satisfy themselves on the eligibility for obtaining registration as NBFC-MFI.

Q3. What are “Net Assets” and “Qualifying Assets”?

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

Qualifying Assets: 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) and total indebtedness not exceeding Rs. 1,00,000, excluding education and medical expenses, will be a qualifying asset provided:

1. loan amount does not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles;
2. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;
3. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs and
4. loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

Q4. What are the limitations imposed on an NBFC which does not qualify as NBFC-MFI?

Ans. An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 10% of its total assets.

Q5. Are there any restrictions on the remaining 15% of the assets that an NBFC-MFI holds?

Ans. No there are no restrictions.

Q6. Can NBFC-MFIs lend funds for personal use/emergencies?

Ans. A part (i.e. maximum of 50 per cent) of the aggregate amount of loans may be extended for other purposes such as housing repairs, education, medical and other emergencies. However aggregate amount of loans given to a borrower for income generation should constitute at least 50 per cent of the total loans from the NBFC-MFI.

Q7. Is there any restriction on pricing of the loan/ interest recoverable on such loans?

Ans. The interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:

i. Cost of funds, plus margin

Cost of funds means interest cost and margin is a mark up of a maximum of 10 per cent for large NBFCs-MFI and 12 per cent for others. Large NBFCs-MFI are those with loans portfolios exceeding Rs.100 crore.

ii. The average base rate of the five largest commercial banks by assets multiplied by 2.75

The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter.

Q8. What procedure is to be adopted for calculation of interest cost (cost of funds) and interest income by NBFC-MFIs?

Ans. The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets.

Q9. What are the processing charges that an NBFC-MFI can levy on its customers?

Ans. Processing charges by NBFC-MFIs shall not be more than 1 % of gross loan amount. Processing charges need not be included in the margin cap. Further, NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse.

Q10. Can an NBFC-MFI charge a differential rate of interest to its customers? If yes, is there any limit imposed by RBI on it?

Ans. Yes, an NBFC-MFI can charge a differential rate of interest to its customers but the variance for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent.

Q11. What are the charges that a customer is supposed to pay for the loan that he takes from an NBFC-MFI?

Ans. A customer needs to know that there are only three components in the pricing of a loan viz. the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof). An NBFC-MFI cannot levy any charges apart from the three mentioned above.

Q12. What should a customer keep in mind when he/she takes a loan from an NBFC-MFI?

Ans. The customer must keep in mind the following

a. The NBFC-MFI is fair and transparent in its dealings with the borrower. Pl see Master Circular on Fair Practices Code, DNBS (PD) CC No.388/03.10.042/2014-15, dated July 1, 2014, and updated each year.

b. No security deposit/ margin/collateral is required to be kept by the borrower with the NBFC-MFI.

c. The borrower should ensure that he gets a loan card from the NBFC-MFI reflecting:

(i) the effective rate of interest charged;

(ii) all other terms and conditions attached to the loan;

(iii) information which adequately identifies the borrower;

(iv) acknowledgement by the NBFC-MFI of all repayments including installments received and the final discharge;

d. All entries in the Loan Card should be in the vernacular language.

e. The interest charged to customer is calculated on a reducing balance basis.

f. NBFC-MFI does not levy penalty on delayed payment

Q13. How can a borrower find about the current interest rate being charged by the NBFC-MFI?

Ans. RBI has made it mandatory for the NBFC-MFIs to prominently display in all its offices and in the literature issued by it and on its website, the effective rate of interest being charged by it.

Q14. Is there any prepayment penalty that can be levied by an NBFC-MFI?

Ans. An NBFC-MFI cannot levy prepayment penalty.

Q15. Is there any cap on an individual membership with SHG/JLG and/or number of MFIs from whom a SHG/JLG/an individual can borrow?

Ans. A borrower can be a member of only one SHG/JLG. He can borrow from NBFC-MFIs as a member of a SHG or a member of a JLG or borrow in his individual capacity. Further, a SHG or JLG or individual cannot borrow from more than 2 MFIs.

Q16. Is it essential for NBFC-MFI to become a member of a Credit Information Company?

Ans. Every NBFC-MFI has to be a member of all the four Credit Information Company (CIC) established under the CIC Regulation Act 2005, provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the conditions regarding membership of SHG / JLG, level of indebtedness and sources of borrowing. While the quality and coverage of data with CICs will take some time to become robust, the NBFC-MFIs may rely on self certification from the borrowers and their own local enquiries on these aspects as well as the annual household income.

Q17. What is the minimum moratorium period applicable in case of NBFC-MFIs?

Ans. There must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first instalment. The moratorium shall not be less than the frequency of repayment. For example, in the case of weekly repayment, the moratorium shall not be less than one week.

Q18. There have been a lot of issues related to methods of recovery used by the MFIs. How has RBI addressed this problem?

Ans. Taking into cognizance, the alleged coercive methods of recovery adopted by MFIs, RBI has mandated that NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment, training and supervision of field staff, incorporating the Guidelines on Fair Practices Code issued for NBFCs vide circular CC No.266 dated March 26, 2012 as amended from time to time. Also, Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.

Q19. Is there a difference in the asset classification and provisioning norms that are applicable to the NBFC- MFIs and other NBFCs?

Ans. Yes, there is a difference in the norms applicable to the NBFC-MFIs. For NBFC-MFIs non-standard asset would mean an asset for which, interest / principal payment has remained overdue for a period of 90 days or more. Provisioning norms are as under:

• 50 per cent of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days.
• 100 per cent of the aggregate of loan instalments which are overdue for a period of overdue for 180 days or more.

Q20. What are the capital adequacy requirement for NBFCs-MFI?

Ans. All NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time shall not exceed 100 per cent of Tier I Capital.

Q21. What is the dispensation given to AP based NBFCs which are not able to comply with the CRAR requirements?

Ans. To be able to facilitate the registration for those AP based NBFCs which are not able to comply with the capital adequacy requirement, for the purpose of calculation of the CRAR, the provisioning made towards AP portfolio can be notionally reckoned as part of NOF and there shall be progressive reduction in such recognition of the provisions for AP portfolio equally over a period of 5 years. Accordingly 100 per cent of the provision made for the AP portfolio as on March 31, 2013 would be added back notionally to NOF for CRAR purposes as on that date. This add-back would be progressively reduced by 20 per cent each year i.e. up to March 2017. No write-back or phased provisioning is permissible.

However, capital adequacy on non-AP portfolio and the notional AP portfolio (outstanding as on the balance sheet date less the provision on this portfolio not notionally added back) will have to be maintained at 15 per cent of the risk weighted assets.

Q22. Are the credit concentration norms applicable to NBFCs-MFIs?

Ans. No, the credit concentration norms are not applicable to NBFC-MFIs.

Q23. Are there any additional dispensations on provisioning and risk weights provided for NBFC-MFIs other than those related to AP –based portfolios provided earlier?

Ans. Yes, loans extended on the lines of credit facilities guaranteed by Credit Guarantee Fund Trust for Micro and Small Enterprises, would be assigned zero risk weights and no provisioning is to be made towards the guaranteed portion.

Q24. Are there any specific corporate governance guidelines applicable to NBFC-MFIs?

Ans. The directions given in Non-Banking Financial Companies – Corporate Governance (Reserve Bank) Directions, 2015 issued vide Notification No. DNBR.019/CGM (CDS)-2015 dated April 10, 2015 are applicable.

Q25. What is the role of a Self Regulatory Organization (SRO) in the monitoring of functioning of NBFC-MFIs?

Ans. The industry associations (SROs in this case) are expected to facilitate compliance by the Non-Banking Financial Companies that are engaged in microfinance (NBFC-MFIs) with the regulations and code of conduct and function in the best interest of the customers of the NBFC-MFIs. The membership of NBFC-MFIs in the industry association/SRO will be seen by the trade, borrowers and lenders as a mark of confidence and removal from membership will be seen as having an adverse impact on the reputation of such removed NBFC-MFIs.

Q26. What is the responsibility of a SRO with regard to the Microfinance sector?

Ans. The SRO holding recognition from the Reserve Bank will have to adhere to a set of functions and responsibilities, such as formulating and administering a Code of Conduct, having a grievance and dispute redressal mechanism for the clients of NBFC-MFIs, responsibility of ensuring borrower protection and education, monitoring compliance by NBFC-MFIs with the regulatory framework put in place by the Reserve Bank, surveillance of the microfinance sector, training and awareness programmes for the members, Self Help Groups, etc. and submission of its financials, including Annual Report, to the Reserve Bank.

Q27. Is it essential for an NBFC-MFI to be a member of the Self Regulatory Organisation (SRO)?

Ans. Membership to the SRO is not mandatory. However, NBFC-MFIs are encouraged to voluntarily become members of at least one SRO.