Qualifying Asset Threshold For NBFC-MFIs Reduced

The Reserve Bank of India (RBI) has recently reduced the ‘qualifying asset threshold’ for non-banking financial companies – microfinance institutions (NBFC-MFIs) to 60% (net of intangible assets) from 75% of total assets.

Definition of Qualifying Asset

The definition of qualifying asset is now aligned with the definition of ‘microfinance loans’.
A microfinance loan is defined as a collateral-free loan given to a household having annual household income up to ₹3 lakh.
- For this purpose, the household means an individual family unit, i.e., husband, wife and their unmarried children.

About the Revision

Legal Provision: RBI has revised the paragraph 8.1 of the Master Direction – Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022
- The provision lays down the “Qualifying Assets Criteria” for Non-Banking Financial Companies – Microfinance Institutions (NBFC-MFIs).
Alignment with MicroFinance: The definition of “qualifying assets” has now been aligned with the broader definition of “microfinance loans” provided in paragraph 3 of the Master Direction.
New Provision: Qualifying assets of NBFC-MFIs shall now constitute a minimum of 60% of the total assets (netted off by intangible assets), on an ongoing basis.
Remediation Plan: An NBFC-MFI will have to approach the Reserve Bank for a remediation plan if it fails to maintain the qualifying assets for four consecutive quarters
Significance: The provision introduces both flexibility and accountability, allowing NBFC-MFIs the opportunity to course-correct without facing immediate regulatory penalties, while also keeping the regulator informed.

Implications of the Revised Norm

Alignment with Core Microfinance Lending: The revision ensures that NBFC-MFIs continue to focus primarily lending to low-income households meeting the microfinance definition.
Diversification: Lowering the threshold will help the microfinance sector to diversify and expand its assets and operations and improve the financial position of the MFIs ensuring balance sheet stability and positioning us for robust cross-cycle earnings
Ongoing Compliance Mandate: The mandate of 60% threshold on an ongoing basis ensures continuous adherence to the institution’s purpose and limits the diversion of resources toward non-core lending segments.
Structured Response for Non-Compliance: RBI’s introduction of the remediation mechanism in case of non compliance will outline the institution’s strategy for realignment and corrective actions.

Non-Banking Financial Company (NBFC)?

Registered: A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 or Companies Act, 2013
NBFCs are engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities or other marketable securities of a like nature, leasing, hire-purchase, etc., as their principal business.
- NBFCs does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
Types: there are 8 types of NBFC ie,
- Asset Finance Company (AFC); Investment Company (IC); Loan Company (LC); Infrastructure Finance Company (IFC); Core Investment Company (CIC); Infrastructure Debt Fund- Non- Banking Financial Company (IDF-NBFC) and Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI).
Difference Between Banks and NBFCs: The major differences between banks and NBFCs are given below,
- NBFCs cannot accept demand deposits
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of deposit taking NBFCs.

About NBFC-MFI

NBFC-MFI” means a non-deposit taking NBFC which has a minimum of now 60 percent of its total assets deployed towards “microfinance loans” as defined under Reserve Bank of India (Regulatory Framework for Microfinance Loans) Directions, 2022

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