Tuesday, April 20

The common “Code for Responsible Lending” (CRL) for microfinance has a few big names missing

The common “Code for Responsible Lending” (CRL) for microfinance has a few big names missing from it, at least for now, putting a question mark over its impact and likelihood of success in its current form.

Bandhan Bank, the country’s largest microfinance player with one-fifth market share, has declined to be a part of the code in its current form. HDFC Bank with growing microfinance business too has not signed yet, even as lenders such as Axis Bank, Kotak Mahindra Bank and IndusInd Bank have signed it, two people familiar with the development said.

Bandhan Bank Managing Director Chandra Shekhar Ghosh said that the code in its current form is restrictive for the bank’s business growth. He said the code should have spelt out what should be the ideal business conduct instead of limiting the quantum of loan given by banks.

“The code is welcome, but this cannot be applicable to banks,” Ghosh told ET in an interview. “Banks have bigger loan-ticket profile. The code should be for business behavioural practices, but not on loan size when Reserve Bank of India’s guidelines are already in place.”

Ghosh also said that the credit-risk evaluation process is more robust in a bank compared with that at a micro-financier.

Last month, the central bank raised the lending limit for NBFC-MFIs to Rs 1.25 lakh per borrower from earlier Rs 1 lakh. RBI rules also specify that not more than two NBFC-MFIs lend to a specific borrower, but there is no cap on the number of banks lending to the same borrower.

The common code was unveiled by Microfinance Institutions Network (MFIN), the industry body for NMFC-MFIs in September. It has been trying to bring together all lenders engaged in micro lending including bans and small finance banks on the same platform to adopt the code. It has proposed to limit the loan size to Rs 1 lakh per micro borrower irrespective of the profile of lenders. It also said that not more than three lenders (agnostic of their stature) should lend to a single borrower.

“CRL is the overall microfinance industry response to responsible lending to this sensitive customer segment. Increasingly, clients, investors, lenders, depositors, rating agencies and analysts will ask “Are you a responsible lender”,” said MFIN chairperson Manoj Nambiar.

“RBI is very supportive and happy that we are all getting together to work on a prudent set of guidelines on our own. They want to be informed on a regular basis on sign ups and also compliance,” he said.

Bandhan, in its earlier avatar as an NBFC-MFI before transforming into a bank in August 2015, was part of the earlier microfinance code of conduct. Now, as a bank it has Rs 40,000 crore micro loans out of its total asset size of Rs 64,200 crore, making it by far the largest micro loan giver.

To date, 97 entities — 76 NBFC-MFIs, four banks, four small finance banks, two non-banking finance companies (NBFC) and 11 not for profit firms – have signed the new CRL, which has former RBI deputy governor HR Khan as the chair of its steering committee.

A diverse set of lenders such as NBFC-MFIs, banks, small finance banks, NBFCs and non-profit/section 8 MFIs — under different regulatory frameworks – extend micro loans to more than 50 million women borrowers from low-income households.

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