Microfinance institutions or MFIs are financial institutions that provide loans and other financial services to poorer sections of society. Usually, their area of operations of extending small loans are rural areas and among low-income people in urban areas. Some of the MFIs, that qualify certain criteria and are non-deposit taking entities, come under RBI wings for NBFC Regulation and supervision. These “Last Mile Financiers” are known as NBFC MFI or Non-Banking Financial Company-Microfinance Institutions. The objective of covering them under RBI was to make these NBFC MFIs healthy and accountable. They have to get NBFC License with RBI and fulfill the conditions as laid down for them.

NBFC MFI is a non-deposit taking NBFC (other than a company licensed u/s 25 of the Indian Companies Act, 1956) that meets the following conditions:

  1. Minimum Net Owned Funds (NOF) of Rs.5 crore. (For those registered in the North Eastern Region of the country, Rs. 2 crore is required as minimum NOF).
  2. At least 85% of its Total Net Assets are in the nature of “Qualifying Assets.”

An NBFC, not qualifying as an NBFC MFI, is not to extend loans to the micro-finance sector, which, in aggregate, is more than 10% of its total assets.

The only difference between an NBFC MFI meaning and other NBFC meaning is that while other NBFCs can operate at a very high level but MFIs cater to only the smaller level of social strata, with need of smaller amounts as loans.

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 as on January 1, 2012 are reckoned towards meeting both the Qualifying Assets criteria as well as the Total Net Assets criteria. These assets have been allowed to run off on maturity and cannot be renewed.

“Net assets” are total assets excluding cash, bank balances, and money market instruments.

“Qualifying assets” are loans that meet below specifications:

  • Loan disbursed by an NBFC MFI 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 not more than Rs. 75,000 in the first cycle and Rs. 1,25,000 in subsequent cycles,
  • The borrower does not owe more than Rs.1,25,000 in total. To calculate the total indebtedness of a borrower, any loans taken to fulfill education and medical expenses shall be excluded,
  • For a loan of Rs. 30,000 or more, the duration of the loan should not be less than 24 months, with prepayment without penalty,
  • Loan to be extended without any security or collateral,
  • The loan is repayable on either weekly, fortnightly or monthly instalments, as chosen by the borrower,
  • The aggregate amount of loans, given for income generation, is not less than 50 % of the total loans given by the MFIs. The remaining part of the aggregate amount of loans may be extended for other purposes such as housing repairs, personal expenses, education, medical, or other emergencies,
  • The income derived from the balance of 15% of the Qualifying Assets shall be in accordance with the provisions provided specified for it.

Regulatory Structure for NBFC MFI

Pre-Registration Conditions

For New NBFC

Registration process of NBFC is complex and time taking (it takes at least 2-3 months) due to the requirement of NBFC Registration from RBI.

  1. To register as an NBFC, the business needs to be registered as a Company under Companies Act, 2013.
  2. Have a minimum NOF of Rs.5 crore (other than those registered in the North Eastern Region of the country who require NOF of Rs.2 crore)

For Existing NBFCs

All NBFCs already registered with RBI, which want to convert to NBFC MFI, are to seek registration with RBI, subject to the condition that they NOF at Rs. 5 crore. If this condition is not fulfilled, they must ensure that loans to the Microfinance sector (i.e. individuals, Self Help Groups or Joint Liability Groups) will be less than 10% of its Total Assets.

To encourage NBFCs operating in North Eastern Region, the minimum NOF is to be maintained at Rs. 2 crore.

Post Registration Conditions

All new NBFC-MFIs shall maintain a capital adequacy ratio or CAR (including Tier-I and Tier-II capital) not be less than 15% of its aggregate risk-weighted assets. The total of Tier-II capital, at any time, should not exceed 100% of Tier-I Capital.

Tier-I is the capital that can absorb the losses without the entity being required to cease trading,

Tier-2 is the capital that can absorb losses at the time of winding–up and so the depositor may not be completely protected.

Capital Adequacy Ratio Norms

  1. NBFCs to be classified as NBFC MFIs are required to maintain a minimum CRAR of 15%.
  2. The NBFC MFIs in the state of Andhra Pradesh (now Telangana & AP) which have more than 25% loan portfolio will have to maintain CRAR at 15%.

Asset Classification Rules

  1. Standard asset means the asset which does not disclose any problem nor carry more than normal risk attached to the business. And no default in repayment of principal or payment of interest is perceived, related to it.
  2. Non-performing assets are assets for which, interest/principal payment is lying overdue for 90 days or more.

Provisioning Rules

  • Many NBFC MFIs in the earlier state of Andhra Pradesh (now Telangana and AP) have had to provide sizeable amounts towards the non-performing assets. To reflect the true and fair picture of the financials of the NBFC MFI in the Balance Sheet, the provisioning made towards the AP portfolio was to be as per the current provisioning norms i.e. Prudential Norms laid by RBI for SI-NBFC (Non-Deposit Accepting or Holding) or Non-SI-NBFC (Non-Deposit Accepting or Holding).
  • The aggregate loan provision to be maintained by NBFC-MFI, from the non-AP portfolio, should never go below:
    1. 1% of the outstanding loan portfolio, or
    2. 50% of the aggregate loan instalments that are overdue for more than 90 days and less than 180 days. And 100% of the aggregate loan instalments which are outstanding for 180 days or more.

whichever is higher.

  • All other provisions described for SI-NBFC or Non-SI-NBFC (Non-Deposit Accepting or Holding) apply to NBFC MFIs as well. Except if specified otherwise.

Regulations Concerning Loans & Funding

Pricing of Credit

  • The margin cap for all NBFCs, irrespective of their size, must not exceed 10% for large MFIs (loan portfolios over Rs.100 crore) and 12% for the others.
  • The interest rates charged by an NBFC MFI to its borrowers is to be the lower of:
    1. The cost of funds plus the margin (10% or 12% as mentioned above), or
    2. The average base rate of the 5 largest commercial banks by assets multiplied by 2.75. This rate shall be advised by RBI on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter.
  • NBFC MFI will ensure that the average interest rate on loans during a financial year (FY) does not exceed the average borrowing cost during that FY plus the margin, within the prescribed cap.
    1. Further, while the rate of interest on individual loans may be more than 26%, the maximum variance permitted for individual loans between the minimum and maximum interest rate cannot be more than 4%.
    2. The average interest paid and charged by the MFI is to be calculated on average monthly balances of outstanding borrowings and loan portfolio respectively. The figures to be certified by Statutory Auditors, annually, and also disclosed in the Balance Sheet.

However, the condition relating to the maximum variance permitted does not apply to loans being provided from the funding received by National Scheduled Castes Finance & Development Corporation (NSFDC). Such loans must be directly credited to the borrower’s accounts with banks.

Any borrowing from NSFDC must be excluded while calculating the average cost of funds of the company to estimate the price of the general credit, excluding the beneficiaries targeted by NSFDC. Proper records and disclosure of funds received or lent out from NSFDC are to be maintained in the balance sheet of the NBFC MFI.

NBFC MFI shall inform the concerned Regional Office of RBI of its being appointed as a channelising agent by NSFDC within 30 days from the date of such appointment.

  • Processing charges not to exceed 1 % of the gross loan amount. These charges need not be included in the margin cap or the interest cap.
  • NBFC MFI shall recover only the actual cost, and not administrative charges, of insurance for group, or livestock, life, health for borrower & spouse.

Fair Practices Code in Lending

Transparency in Interest Rates:

  • The pricing of the loan should include only 3 parts. The interest charge, the processing charge and the insurance premium (inclusive of the administrative charges).
  • No penalty will be charged on delayed payment.
  • No Security Deposit to be collected from the borrower.
  • The form of the loan agreement has to be standardised.
  • Every borrower must be provided a loan card with:
    1. the effective rate of interest charged,
    2. all other terms and conditions attached to the loan,
    3. information which identifying the borrower, and
    4. acknowledgments by the NBFC MFI of all repayments including instalments received and the final discharge,
    5. The entries in the Loan Card to be made in the local language.
  • The effective rate of interest charged on loans should be prominently displayed in all offices and on the website of the NBFC MFI.

Multiple-lending, Over-borrowing & Ghost-borrowers

  • NBFC MFIs can lend to individual borrowers whether they are members of the Joint Liability Group(JLG)/Self Help Group(SHG).
  • A borrower must not be a member of more than one SHG/JLG.
  • Same borrower not be financed by more than 2 NBFC MFI.
  • The interim time between the grant of the loan and the due date of the first instalment should not be less than the frequency of repayment.
  • Recovery of loans given not following the regulations to be suspended till all prior existing loans are repaid wholly.
  • All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. With the disbursement function to be closely supervised.

Necessary Compliances 

RBI mandates every NBFC MFI has to become a member of at least one 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 JLG/SHG, level of indebtedness and sources of funds. Such membership will ensure compliance with most of these conditionalities.

Methods of Recovery

  1. NBFC MFIs shall ensure that the Fair Practices Code is followed while recruitment, training, and supervision of field staff.
  2. Recovery should be non-coercive and be made only at a central designated place. If the borrower fails to come to the central designated place on 2 or more successive occasions, then field staff shall be allowed to recover the loan.

Corporate Governance

The Master Circular of July 01, 2015, issued for NBFCs on Corporate Governance, applies to NBFC MFIs also.

Improvement in Efficiency

The backend and back-office operations of the NBFC MFI and update their Information Technology and systems to simplify procedures, achieve better control and reduce costs.

Other Guidelines for NBFC MFI

The guidelines of RBi are contained in, and updated from time to time, the circular RPCD.CO.Plan BC.66/04.09.01/2010-11 dated May 3, 2011, issued by the Rural Planning and Credit Department (RPCD) of RBI titled “Bank loans to Micro Finance Institutions (MFIs).

Channelizing Agents for Schemes operated by various Government Agencies

  1. The department of channelizing agents shall be considered as a separate business segment. These loans shall not be included for ascertaining the minimum qualifying assets criteria of 85%.
  2. The interest on such loans not to be included while calculating the difference between the maximum and minimum interest rates.
  3. Cost of such funds not to be considered while ascertaining the average cost of funds or the interest rates charged to borrowers.
  4. Proper accounts and records for such loans as well as funding from concerned agencies shall be maintained by the NBFC MFI. Separately disclosed in the financial statements.
  5. The asset classification, income recognition, provisioning norms, and other prudential norms, as applicable to NBFC MFIs, apply here as well. Except when the NBFC MFI does not bear any credit risk.
  6. All such loans to be reported to CICs to restrict multiple borrowings of a borrower.

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Frequently Asked Questions

Q. What is an NBFC MFI?

An NBFC MFI is a non-deposit taking NBFC with a minimum Net Owned Funds (NOF) of Rs. 5 crore (Rs. 2 crore for those registered in the North Eastern Region of the country) and having at least 85% of its net assets as “qualifying assets”.

Q. What is the process of NBFC registration?

  1. Apply online at the official RBI portal for the NBFC Registration. A set format is prescribed, to be downloaded from the website. The application should be accompanied by the documents in support of the application. On submission, a reference number, CARN, gets generated.
    • Submit the hard copies of the application and the documents that were uploaded on the portal, to the Regional Office of RBI.
    • After validating the submitted application, the regional office forwards the application to the Central office of RBI.
    • They carefully examine the application and the documents. If all the terms u/s 45-I A of RBI Act, 1934 are being fulfilled then the NBFC certificate will be granted.

Q. What documents are required to apply for an NBFC license?

  • Documents of the administration of the company.
  • Certificate of Incorporation of the Company.
  • MoA and AoA.
  • Address proof of the company.
  • Detailed information about Directors or Partners of the Company.
  • Well-audited accounts of the company for at least the past 3-consecutive years.
  • Board Resolution approving the establishment of NBFC.
  • Bank Account where the paid-up equity share capital of at least Rs. 2 Crore, is deposited.
  • Latest KYC.
  • Net worth certificate.
  • Clean banker’s report.
  • Other relevant documents on request.

Q. What are “Net Assets”?

“Net assets” are defined as Total Assets other than cash and bank balances, and money market instruments.

Q. What are “Qualifying Assets?

“Qualifying Assets” are loans disbursed to a borrower with a household annual income of less than Rs.1,00,000 in rural areas or Rs. 1,60,000 in urban and semi-urban regions. Total indebtedness less than Rs. 1,00,000 (excluding education and medical loans) will be a qualifying asset if:

  1. The loan amount is less than Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent cycles.
  2. The duration of the loan not to be less than 24 months for the loan amount above Rs. 15,000 with prepayment without any penalty.
  3. The aggregate amount of loans, given for income generation, is equal to or more than 50% of the total loans given by the MFI.
  4. The loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.