Representatives of microfinance institutions (MFIs) urged the Ministry of Finance on Wednesday to revisit the Reserve Bank of India’s (RBI) updated asset qualification norms. The regulations, which increased the required allocation to microfinance activities from 75% to 85% of total assets, have raised concerns within the sector.
“We have requested the government to address this issue in the upcoming Budget,” said Jiji Mammen, Executive Director and CEO of Sa-Dhan, a key participant in the meeting.
Revised Norms and Their Implications
The RBI’s 2022 regulatory updates apply across the microfinance sector, covering banks, small finance banks (SFBs), and non-banking financial companies (NBFCs). These guidelines introduced a uniform household loan cap of ₹3 lakh for microfinance loans and removed the distinction between rural and urban areas.
To qualify for an NBFC-MFI license, institutions must now allocate at least 75% of their assets to microfinance activities, with NBFCs required to increase their microfinance portfolio from 10% to 25% of total assets.
MFI representatives argue that lowering the qualification threshold would mitigate concentration risk, reduce dependence on unsecured assets, and enable greater diversification. Additionally, it would allow MFIs to extend higher-value loans to clients with established credit histories.
Key Issues Raised
The meeting, chaired by Department of Financial Services (DFS) Secretary M. Nagaraju, was attended by senior finance ministry officials and representatives from NBFCs and MFIs.
Participants highlighted the need for a dedicated funding mechanism to support MFIs, particularly midsized and smaller entities struggling to secure bank loans. Proposals included a credit guarantee mechanism and an equity funding system to ease financial constraints.
“MFIs also requested a GST exemption on co-lending activities, which would significantly enhance their financial viability and growth potential,” said an MFI executive who attended the meeting. DFS officials indicated that the Department of Revenue is reviewing this request.
Additionally, representatives pointed out the challenges posed by stringent rating systems, which hinder smaller MFIs from accessing funding.
Calls for Regional Support
MFIs emphasized the need for a dedicated fund targeting the northeastern region in the upcoming Union Budget. This demand aligns with broader efforts to bolster financial inclusion in underserved areas.
Sectoral Challenges Persist
The RBI’s latest Financial Stability Report noted decelerating credit growth in the microfinance sector for FY25, following a period of rapid expansion in the previous three years. Rising delinquencies have become a pressing concern, with stressed assets (31–180 days past due) increasing from 2.15% in March 2024 to 4.3% in September 2024.
“The sector is under stress, with delinquencies evident across lenders and ticket sizes,” the report stated.
DFS Secretary Nagaraju’s ongoing pre-Budget consultations also include meetings with financial technology firms and public sector banks, scheduled ahead of the Union Budget for 2025-26.