NBFC-MFIs Proposal to Raise Household Income Limit for Micro Loans
- March 1, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
NBFC-MFIs Proposal to Raise Household Income Limit for Micro Loans
Subject: Economy
Section: Monetary Policy
The NBFC-MFIs (Non-Banking Finance Company – Microfinance Institutions) are urging the Reserve Bank of India (RBI) to reconsider the criteria for annual household income limits for providing microloans, citing the growing needs of individual borrowers. Here’s an overview of the situation:
Request for Revised Criteria:
- Current Income Limit:
- The existing annual household income limit for micro loans stands at ₹3 lakh.
- Proposed Increase:
- NBFC-MFIs are requesting an increase in this limit to approximately ₹5 lakh.
- Previous Revision:
- The last revision to the income limit criteria was in 2022, when it was raised from ₹1.25 lakh in rural areas and ₹2 lakh in urban and semi-urban areas to a uniform ₹3 lakh.
Industry Insights:
- Discussion with RBI:
- Regarding the income limit revision.
- Typically, the RBI does not revise these criteria on an annual basis, but rather every two to three years.
- After the conclusion of this financial year, with a review of numbers and alignment with government schemes and inflation, a case can be made to the RBI for a reevaluation.
- Definition of Microfinance Loan:
- As per RBI, a microfinance loan is a collateral-free loan provided to a household with an annual income of up to ₹3 lakh.
- The household, in this context, refers to the individual family unit consisting of the husband, wife, and their unmarried children.
- Loan Size Trends:
- The average microfinance loan size has shown an increase, reaching ₹47,374 in Q3 FY24, compared to ₹41,123 in the previous year and ₹39,512 in Q3 FY22, based on the latest MFIN data.
Industry Portfolio:
- Growth and Clientele:
- Microfinance operations have added over one crore unique clients in the past financial year.
- The industry witnessed a robust growth of 24.6% over the previous financial year, with the total portfolio reaching ₹3,99,442 crore.
- Delinquency and Portfolio Health:
- Portfolio delinquency has returned to pre-Covid levels, indicating an improvement in the health of the microfinance portfolio.
- Industry Breakdown:
- NBFC-MFIs are the largest providers of micro credit, holding a loan amount outstanding of ₹1,56,245 crore, which accounts for 39.1% of the total industry portfolio.
- Banks follow with 13 entities holding a total loan outstanding of ₹1,33,759 crore, constituting 33.5% of the micro-credit universe.
- Small Finance Banks have a total loan amount outstanding of ₹70,449 crore, accounting for 17.6% of the market.
- NBFCs represent 8.9%, and other MFIs account for 0.8% of the micro-credit universe.
The push for a revision in the annual household income limit for microloans by NBFC-MFIs reflects the evolving needs of borrowers and the industry’s efforts to align with changing economic dynamics.
Definition of a Microfinance Loan: The RBI revised the definition of a microfinance loan to indicate a collateral-free loan given to a household having annual income of up to Rs. 3 lakh. Earlier, the upper limits were Rs.1.2 lakh for rural borrowers and Rs.2 lakh for urban borrowers.