India: NBFC-MFIs to Take a Hit as RBI Reins in Self-help Groups
India, January, 15 2016 -
Banks are asked by RBI to start sharing SHG data with credit bureaus. This move will put a check on overleveraging and borrowings by individuals from multiple sources and can possibly strain the asset quality of a few NBFC-MFIs, says a report
The Reserve Bank of India (RBI) has asked banks to collect credit information of members from self-help groups (SHGs) while sanctioning a loan to new SHGs, or renewal of existing loans, and granting of additional loans to existing groups. This move will hit credit growth and asset quality of non-banking finance companies (NBFCs) and micro finance institutions (MFIs). This is because, the data sharing will rein in the prevalence of overleveraging and multiple-source borrowing, thus weeding out persons who are currently borrowing from SHGs to repay NBFC-MFIs, says a research report.
In the research note, Religare Capital Markets Ltd, says, "With this move, the RBI aims to put a check on overleveraging and borrowings by individual customers from multiple sources, which will improve the sector’s outlook in the longer run. Though MFI growth and asset quality are likely to suffer in the near term, we believe the central bank’s move will be long-term beneficial for all stakeholders."
According to Religare, due to the RBI's move, MFI credit growth will take a hit over medium term. As on FY14, SHG credit from banks stood at Rs429 billion and formed 1.5 times of MFI credit. SHGs have a large presence in thriving MFI markets such as Karnataka, Kerala, Tamil Nadu, West Bengal and Odisha, and account for about 60% of total microfinance credit.
"The new guidelines will dampen growth over the medium term as the aggregation of MFI and SHG data will lead to a potential shakeout of duplicate customers as many may reach the cap of Rs1 lakh on microcredit that can be availed per person, and a breaching of the cap on the number of institutions permitted to lend to an individual-maximum of two, which may now be applicable on the aggregate data. The above limits currently apply only to joint lending group (JLG) loans, but upon data aggregation the limit is likely to be made applicable to bank as well as MFI borrowings," the report says.
At present, the absence of a shared database masks non-performing assets (NPAs) of NBFC-MFIs. Once the database becomes fully operational, it will put a check on such borrowers and can possibly strain the asset quality of a few NBFC-MFIs. Due to this, Religare says it sees repayment difficulties for customers who are currently borrowing from weak public sector banks and paying back NBFC-MFIs.