New microfinance guardrails from June 1 while Tamil Nadu plans to regulate recovery operations

Time of India

28-04-2025

The microfinance sector is facing yet another asset quality crisis with the sector's gross non-performing assets ratio climbing to 13.2% of the gross loan of Rs 3.92 lakh crore as of December 31, 2024.
Sa-Dhan has tightened microfinance regulations amid rising asset quality concerns, particularly with potential disruptions in Tamil Nadu due to new state regulations. The new guidelines, effective June 1, include restrictions on top-up loans, processing fees, and the number of lenders per borrower. These measures aim to address over-indebtedness and promote responsible lending practices within the sector, which faces a 13.
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Kolkata: Microfinance self regulator Sa-Dhan has tightened the guardrails as the asset quality stress continues to bother the lenders to the bottom of the pyramid segment.The sector may see fresh delinquencies especially from Tamil Nadu with the state government planning to enact a law to regulate microfinance operations in the state, in line with what Karnataka did a couple of months back. Tamil Nadu accounted for nearly 11% of the sectoral gross loan portfolio of Rs 3.92 lakh crore at the end of December last year.Sa-Dhan has told its members to stop giving top-up loans to borrowers who have not repaid at least 50% of the existing loans and capped processing fees at 1.5% of a loan. The institution has reiterated that the number of lenders per microloan borrower shall not exceed three and asked members to verify whether the loans are utilised for the purpose these are taken.The new guideline will be applicable from June 1.These are part of a set of 10 guardrails, many of which are already in force. A few guardrails like three-lender cap or limiting the household loan exposure to Rs 2 lakh including retail loans were earlier prescribed by Microfinance Institutions Network, another self-regulator for the sector.The new set of rules are being prescribed after a conference with chief executives of microfinance lenders last week.'The association holds that stronger guidelines should be introduced for lending institutions to safeguard the microfinance sector and, in particular, its clients," Sa-Dhan executive director Jiji Mammen said. He underscored on addressing three key issues on a continuous basis -- transparent and fair pricing, prevention of over-indebtedness and adherence to responsible lending practices.The guardrails include mandatory credit bureau check at the household level, no loan to default borrowers with more than 60 days due and total outstanding such loan exceeds Rs 3,000, introduction of PAN card as the primary identification.The microfinance sector is facing yet another asset quality crisis with the sector's gross non-performing assets ratio climbing to 13.2% of the gross loan of Rs 3.92 lakh crore as of December 31, 2024.Tamil Nadu may become the fresh stress-point for the sector with the government trying to regulate lending activities to the economically weaker section."We believe this would be targeted towards the unregulated lenders. However, this would create some disruptions as seen in Karnataka," a person aware of the matter said.