Directions for NBFC – Micro Finance MFIs

Directions for NBFC – Micro Finance MFIs

Non-Banking Financial Company – Micro Finance Institutions (NBFC-MFIs) and other NBFCs offering microfinance loans must follow specific guidelines. These are in addition to the general instructions they already comply with.

Capital Requirements:

NBFC-MFIs need to maintain a capital adequacy ratio of at least 15 percent of their risk-weighted assets. This includes both on-balance sheet and off-balance sheet items. Tier 2 capital should not be more than 100 percent of Tier 1 capital. The calculation of this ratio must consider various factors, including the treatment of deferred tax assets and liabilities.

For loans under certain government schemes, NBFC-MFIs should assign risk weights as specified in the relevant sections of the Directions.

Asset Classification and Provisioning Norms:

NBFC-MFIs should classify assets as either standard or non-performing based on repayment status. They must also set aside provisions for non-performing assets. This includes a minimum of 1 percent of the outstanding loan portfolio or a higher percentage based on overdue loan instalments. Special provisions apply to loans covered under specific government guarantees.

NBFC-MFIs must also follow standard asset provisioning norms as outlined in the Directions.

Channelizing Agents for Government Schemes:

When acting as channelizing agents for government schemes, NBFC-MFIs should treat these loans as a separate business segment. They must maintain distinct accounts for these loans and follow applicable norms, except where they bear no credit risk. These loans should also be reported to Credit Information Companies.

Geographical Diversification:

NBFC-MFIs should set internal limits to avoid over-concentration in specific geographical areas.

Membership in a Self-Regulatory Organization (SRO):

All NBFC-MFIs must join at least one SRO recognized by the Reserve Bank and adhere to its Code of Conduct. The SRO must fulfil certain functions and responsibilities, which the Reserve Bank may update to enhance sector efficiency.

Monitoring of Compliance:

NBFC-MFIs are primarily responsible for complying with regulations. Industry associations/SROs and banks lending to NBFC-MFIs also play a role in ensuring adherence to the regulatory framework.

Directions for Microfinance Loans:

Microfinance loans offered by NBFCs are governed by the Reserve Bank of India’s directions. An NBFC that is not an NBFC-MFI can extend microfinance loans up to a limit of 25 percent of its total assets.

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