MFIN Delays Implementation of Borrower-Lender Cap by Three Months; Other Covenants to Take Effect

The Microfinance Industry Network (MFIN), a self-regulatory organization for the microfinance sector, has announced the postponement of its plan to cap the number of lenders per borrower. Initially scheduled for an earlier implementation, the cap will now take effect on April 1. The delay has been attributed to the time required to revamp IT systems and back-end operations to support the changes effectively.

Speaking to CNBC-TV18, Alok Misra, CEO of MFIN, stated, “Adjustments to IT systems and operational frameworks require additional time.” He also clarified that while the cap on lenders will take effect in three months, "other covenants are already being implemented starting January 1." This phased approach aims to ensure that all operational and regulatory aspects are aligned with the new guidelines.

Earlier reports from Livemint on January 2 highlighted that the deferment was driven by the need to give stakeholders sufficient time to address challenges such as managing delinquencies and ensuring a smooth transition. MFIN’s plan to limit the number of lenders per borrower to three represents a significant shift from the current limit of four, aiming to reduce over-indebtedness and financial stress on borrowers.

This decision follows heightened scrutiny from the Reserve Bank of India (RBI). On October 17, the central bank took enforcement actions against four non-banking financial companies (NBFCs) and NBFC-MFIs, including Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv. These actions stemmed from "material supervisory concerns," particularly regarding non-compliance with pricing policies, such as discrepancies in weighted average lending rates (WALR) and the interest spreads over funding costs. The RBI directed these entities to cease loan disbursals and approvals until corrective measures were taken.

In response, MFIN implemented a revised framework in November, introducing stricter measures to enhance the sector’s stability. Key changes include capping the number of lenders per borrower and recommending a limit of ₹2 lakh on the total indebtedness of microfinance borrowers. These measures are designed to prevent over-borrowing and mitigate the risks of default.

Over the past year, MFIN and Sa-Dhan, another self-regulatory body for the microfinance sector, have collaborated to adopt several proactive measures. These include the introduction of guardrails such as better borrower profiling, enhanced credit risk assessment mechanisms, and stricter adherence to fair lending practices. Such steps reflect the industry’s commitment to balancing growth with borrower protection.

Despite these efforts, challenges persist. A recent note from Emkay Global Financial Services projected an increase in stress levels in the microfinance sector during Q3 FY25. Factors contributing to this include rising delinquencies and external economic pressures, even as MFIN tightens its guardrails. The sector's ability to navigate these challenges will depend on its commitment to regulatory compliance, operational resilience, and borrower-centric practices.

The microfinance sector plays a vital role in financial inclusion, providing underserved populations with access to credit. However, the delicate balance between expanding access and ensuring sustainable borrowing practices remains critical. As MFIN prepares for the upcoming changes, the focus will be on addressing systemic vulnerabilities while fostering trust among borrowers and lenders. This evolution underscores the importance of adaptability and transparency in strengthening the sector’s long-term foundations.