Microfinance Self-regulator MFIN Tightens Loan Underwriting Guidelines To Curb Borrower Over-Indebtedness

New Delhi, Oct 9 (KNN) In a significant move to address concerns over borrower over-indebtedness, the Micro Finance Institutions Network (MFIN), the self-regulatory body for India's microfinance sector, has announced stricter loan underwriting guidelines for its members.

The revised guidelines aim to tackle current lending challenges, particularly the lack of comprehensive data on borrowers' monthly financial outflows from existing loans and bullet repayments.

MFIN's decision comes in response to varying practices among microlenders and seeks to establish uniformity in loan assessment procedures.

The new guidelines are expected to help lenders develop more robust underwriting policies, especially when dealing with bullet repayments and missing EMIs. However, MFIN has not disclosed specific details of the new measures.

Industry observers have previously raised alarms about the prevalence of over-indebtedness among microfinance borrowers, with some individuals reportedly holding more than five loans simultaneously.

Some industry participants anticipate that the tightened practices may lead to short-term stress on asset quality and loan growth.

Analysts have also highlighted potential risks associated with state elections, which have historically impacted credit culture.

The Reserve Bank of India's current regulations require an accurate estimation of a borrower household's monthly loan repayment obligations, stipulating that these should not exceed 50 percent of the household's monthly income.

However, lenders face challenges in obtaining accurate estimates due to limitations in credit reports.

MFIN pointed out that EMI values for consumer or retail loans are often absent from credit reports, as lenders are not mandated to submit this data to credit bureaus.

Similarly, bullet repayments for loans such as gold loans or Kisan credit cards are not captured as monthly outflows, further complicating the assessment process.

The new guidelines were developed following extensive stakeholder consultations over a six-month period and an analysis of 120 million loan records.

This comprehensive approach underscores MFIN's commitment to addressing the complexities of microfinance lending and safeguarding the financial health of borrowers in India's dynamic microfinance sector.

(KNN Bureau)