FAQ's - Non-Banking Financial Company - Micro Finance Institutions (NBFC-MFIs)

(Updated as on October 12, 2017)

Q1. What are the documents required for registration as NBFC-MFI?

Ans. The checklist with respect to application for seeking Certificate of Registration from the Reserve Bank is available on the RBI website: www.rbi.org.in → Regulation → Non-Banking → Forms → Documents required for registration of NBFC-MFI – New Companies and Documents required for registration of NBFC-MFI (Existing NBFCs). Checklists mentioned are indicative and not exhaustive. Bank can, if necessary, call for any further documents to satisfy itself on the eligibility for obtaining registration as NBFC-MFI.

Q2. What are the limitations imposed on an NBFC which does not qualify as NBFC-MFI?

Ans. Such NBFC shall not have more than 10% of its total assets as loans meeting “Qualifying Assets” criteria as defined in the Directions.

Q3. Are there any restrictions on the remaining 15% of the assets that an NBFC-MFI holds?

Ans. No, there are no specific restrictions. However, NBFC-MFIs are required to abide by the guidelines issued to NBFCs in general, regarding terms and conditions of these loans.

Q4. Are the pricing regulations mentioned in the directions applicable to the non-qualifying assets?

Ans. Pricing regulations including variance norms are not applicable for the non-qualifying assets.

Q5. Can renovation/home improvement loans of smaller amount (Approx. 50000) be included under qualifying assets?

Ans. Home loans generally have mortgage of a dwelling unit. If all conditions as applicable for qualifying assets including collateral free loans and not less than 50% of the loan for income generation purpose are met, these may be treated as qualifying assets.

Q6. Can NBFC-MFIs lend funds for personal use/emergencies?

Ans. A part (i.e. maximum of 50 per cent) of the aggregate amount of loans may be extended for other purposes such as housing repairs, education, medical and other emergencies. However, aggregate amount of loans given to a borrower for income generation should constitute at least 50 per cent of the total loans from the NBFC-MFI.

Q7. What are the components which will be considered for the purpose of arriving at the cost of funds as stated under guidelines on ‘Pricing of Credit’?

Ans. The cost of funds will include the following components:

1. Expenses incurred towards interest payments

2. Processing fee including service tax (amortized monthly)

3. Stamp duty charges (amortized monthly)

4. DD charges (amortized monthly)

5. Less interest accrued on security deposit

Q8. Whether the net amount of loan received from lending bank (i.e. loan amount reduced by cash collateral kept as a certain proportion of borrowed amount as deposit) may be used in denominator for computing the cost of funds?

Ans. NBFC-MFIs are not permitted to exclude the amount of cash collateral from total borrowings to arrive at the denominator for computing cost of funds.

Q9. Whether the processing fees both incoming (i.e. received from MFI borrowers) and outgoing fees (paid to lenders) may be amortised by the NBFC-MFI?

Ans. Processing fees should be booked in the accounting period in which these are paid/ received and amortization of the same is not permitted.

Q10. What are the processing charges that an NBFC-MFI can levy on its customers?

Ans. Processing charges by NBFC-MFIs shall not be more than 1% of gross loan amount. Processing charges need not be included in the margin cap. Further, NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health.

Q11. Can an NBFC-MFI charge a differential rate of interest to its customers? If yes, is there any limit imposed by RBI on it?

Ans. Yes, an NBFC-MFI can charge a differential rate of interest to its customers but the variance for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent.

Q12. What are the charges that a customer is supposed to pay for the loan that he takes from an NBFC-MFI?

Ans. A customer needs to know that there are only three components in the pricing of a loan viz. the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof). An NBFC-MFI cannot levy any charges apart from the three mentioned above.

Q13. What should a customer keep in mind for the loans extended by an NBFC-MFI?

Ans. The customer must keep in mind the following

a. The NBFC-MFI is required to be fair and transparent in its dealings with the borrower as provided in guidelines issued under Fair Practices Code.

b. No security deposit/ margin/collateral is required to be kept by the borrower with the NBFC-MFI, in respect of loans included under “Qualifying Assets”.

c. The borrower should ensure that he gets a loan card from the NBFC-MFI reflecting:

1. the effective rate of interest charged;

2. all other terms and conditions attached to the loan;

3. information which adequately identifies the borrower;

4. acknowledgement by the NBFC-MFI of all repayments including installments received and the final discharge;

5. whether the loan is classified as “Qualifying Asset”.

d. All entries in the Loan Card should be in the vernacular language.

e. The interest charged to customer is calculated on a reducing balance basis.

f. NBFC-MFI does not levy penalty on delayed payment

Q14. How can a borrower find about the current interest rate being charged by the NBFC-MFI?

Ans. RBI has made it mandatory for the NBFC-MFI to prominently display in all its offices and in the literature issued by it and on its website, the effective rate of interest being charged by it.

Q15. Is there any prepayment penalty that can be levied by an NBFC-MFI?

Ans. An NBFC-MFI cannot levy prepayment penalty.

Q16. Is there any cap on an individual membership with SHG/JLG and/or number of NBFC-MFIs from whom a SHG/JLG/an individual can borrow?

Ans. A borrower can be a member of only one SHG/JLG. He can borrow from NBFC-MFIs as a member of a SHG or a member of a JLG or borrow in his individual capacity. Further, an SHG or JLG or individual cannot borrow from more than 2 NBFC-MFIs.

Q17. Is it essential for NBFC-MFI to become a member of a Credit Information Company?

Ans. Every NBFC-MFI has to be a member of all Credit Information Companies (CICs) 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 SHG / JLG, level of indebtedness and sources of borrowing. While the quality and coverage of data with CICs will take some time to become robust, the NBFC-MFIs may rely on self certification from the borrowers and their own enquiries on these aspects as well as the annual household income.

Q18. What is the minimum moratorium period applicable in case of NBFC-MFIs?

Ans. There must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first instalment. The moratorium shall not be less than the frequency of repayment. For example, in the case of weekly repayment, the moratorium shall not be less than one week.

Q 19. There have been a lot of issues related to methods of recovery used by the NBFC-MFIs. How has RBI addressed this problem?

Ans. Taking into cognizance the alleged coercive methods of recovery adopted by some NBFC-MFIs, RBI has mandated that NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment, training and supervision of field staff, incorporating the Guidelines on Fair Practices Code issued for NBFCs from time to time. Also, Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.

Q20. Is there a difference in the asset classification and provisioning norms that are applicable to the NBFC- MFIs and other NBFCs?

Ans. Yes, there is a difference in the norms applicable to the NBFC-MFIs for the assets falling under the definition of “Qualifying Assets”. For such “Qualifying Assets” of NBFC-MFIs, non-standard asset would mean an asset for which, interest / principal payment has remained overdue for a period of 90 days or more. The aggregate loan provision to be maintained by NBFC-MFIs at any point of time shall not be less than the higher of a) 1% of the outstanding loan portfolio or b) 50% of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan instalments which are overdue for 180 days or more.

For assets not meeting the “Qualifying Assets” criteria, provisioning norms as applicable to other NBFCs will be applicable.

Q21. What are the capital adequacy requirements for NBFCs-MFI?

Ans. All NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time shall not exceed 100 per cent of Tier I Capital.

Q22. Are the credit concentration norms applicable to NBFCs-MFIs?

Ans. No, the credit concentration norms are not applicable to NBFC-MFIs.

Q23. Are there any additional dispensations on provisioning and risk weights provided for NBFC-MFIs other than those related to AP –based portfolios provided earlier?

Ans. Yes, loans extended on the lines of credit facilities guaranteed by Credit Guarantee Fund Trust for Micro and Small Enterprises, would be assigned zero risk weights and no provisioning is to be made towards the guaranteed portion.

Q24. What is the role of a Self-Regulatory Organization (SRO) in the monitoring of functioning of NBFC-MFIs?

Ans. The industry associations (SROs in this case) are expected to facilitate compliance by the Non-Banking Financial Companies that are engaged in microfinance (NBFC-MFIs) with the regulations and code of conduct and function in the best interest of the customers of the NBFC-MFIs. The membership of NBFC-MFIs in the industry association/SRO will be seen by the trade, borrowers and lenders as a mark of confidence and removal from membership will be seen as having an adverse impact on the reputation of such removed NBFC-MFIs.

Q25. What is the responsibility of a SRO with regard to the Microfinance sector?

Ans. The SRO holding recognition from the Reserve Bank will have to adhere to a set of functions and responsibilities, such as formulating and administering a Code of Conduct, having a grievance and dispute redressal mechanism for the clients of NBFC-MFIs, responsibility of ensuring borrower protection and education, monitoring compliance by NBFC-MFIs with the regulatory framework put in place by the Reserve Bank, surveillance of the microfinance sector, training and awareness programmes for the members, Self Help Groups, etc. and submission of its financials, including Annual Report, to the Reserve Bank.

Q26. Is it essential for an NBFC-MFI to be a member of the Self-Regulatory Organisation (SRO)?

Ans. Membership to the SRO is not mandatory. However, NBFC-MFIs are encouraged to voluntarily become members of at least one SRO.