12-Nov-2015 written by : FSI-Team
Microfinance is a source of financial services including savings accounts, insurance and credit for entrepreneurs and small businesses lacking access to banking and related services. [Source: https://en.wikipedia.org/wiki/Microfinance] The self-regulatory organisation Microfinance Institutions Network (MFIN) was set up in 2009 in consultation with the Reserve Bank of India (RBI), as a controlling body for MFIs. As of March 31, 2014, 48 of the leading NBFC- microfinance institutions (MFIs) are present in 488 of India’s 640 districts, covering 26 states and 4 union territories. [Source: http://mfinindia.org/our-members/]
Owing to the crisis in Andhra Pradesh in 2010 leading to large defaults, the maximum loan amount that could be extended to a borrower was capped at Rs. 50000. However in its monetary policy announcement subsequently, the RBI has now doubled it to Rs. 1.0 lakh from the original amount. Cited as a positive development, MFIs can now lend to customers with more liabilities. This change was brought about after the RBI took into consideration the improvement the MFI sector has undergone recently. [Source:http://www.livemint.com/Industry/LM4OfETppTduXTLQD6BovL/RBI-eases-lending-norms-for-microfinance- companies.html]
Credit Information Companies (CICs), or credit bureaus as they are more commonly known, have almost complete coverage of MFI information in their databases, except for lending information pertaining to Self Help Groups (SHGs). From the initial stages wherein no MFI data was reported to a bureau, it has indeed come a long way.
As per the apex bank, i.e. the RBI, every NBFC-MFI has to be a member of at least one credit bureau established under the CIC Regulation Act, 2005. Members are required to provide timely and accurate data to the bureau, and also use the data available with them to ensure compliance with the conditions regarding membership, level of debt and sources of borrowing.
CICs provide the below mentioned details in their microfinance reports:
In addition, a microfinance score can also be availed of, to facilitate automated decision making. Designed specifically for the Indian market, this market-level risk score predicts the likelihood of a customer default within the next six months.
Following the 2010 crisis, lenders have become more cautious about disbursals and are actively seeking information regarding the potential borrower’s credit history prior to approving a loan application.
As per the current norms, a borrower cannot avail of a loan from a MFI if there are already two NBFC-MFI loans live. This is where the role of credit bureau is critical, as they are able to provide information on two levels, viz. the number of credit lines that a borrower is already availing of, as well as their previous credit history in terms of repayment track record, defaults etc.
The data regarding repayment history is especially important at the time of lending, and hence MFIs make active use of credit bureaus. This information has consequently helped bring down the number of defaults in the MFI business. In the months of April to October 2014, the delinquency rate of MFIs fell by 20%, as per statistics. [Source: Financial Express, January 07, 2014]
As per the International Finance Corporation (IFC) Advisory Services,96% data accuracy has been achieved with the concentrated efforts of both the MFI fraternity and credit bureaus. MFIN is also closely working with the RBI to obtain similar data on SHGs,to increase data coverage.
With emphasis on financial inclusion in India, as the MFI business in India gains momentum, the role of credit bureaus will proportionately increase.