These new Directions shall regulate the Micro-finance Companies. The highlights of these Directions are given herein below:

Separate guidelines in this regard have been issued compulsorily to be complied with:

• Definition of NBFC-MFI
  • To be recognized as a NBFC-MFI it should fulfill the following conditions:
    • It is not licensed under Section 25 of the Companies Act, 1956
    • It has minimum net owned funds of Rs.5 crore, and Rs. 2 crore for those registered in the North Eastern Region of the country.
    • Not less than 85% of its net assets are qualifying assets.
    • Income derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in that behalf.
    • An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 10% of its total assets.

“Net assets” means total assets other than cash and bank balances and money market instruments.

“Qualifying asset” shall mean a loan which satisfies the following criteria:-

1. loan disbursed to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000;
2. Maximum loan amount of Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;
3. Maximum total indebtedness of the borrower is Rs. 50,000;
4. Minimum tenure of the loan is 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;
5.  loan to be extended without collateral;
6. aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs;
7. loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower

The existing NBFCs to be classified as NBFC-MFIs will be required to comply with Prudential, and Asset Classification and Provisioning norms w.e.f. 01.04. 2012.

• Prudential Norms
  • Maintain a capital adequacy ratio consisting of Tier I and Tier II Capital of not less than 15 percent of its aggregate risk weighted assets.
  • The total of Tier II Capital at any point of time, shall not exceed 100 percent of Tier I Capital.
  • The risk weights for on-balance sheet assets and the credit conversion factor for off-balance sheet items will be as provided in Para 16 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve bank) Directions 2007.

NBFCs with asset size less than Rs. 100 crore and to be classified as NBFC-MFIs, will be required to comply with the above norms w.e.f 01.04.2012. Others are already required to maintain minimum CRAR of 15%.

The CRAR for NBFC-MFIs which have more than 25% loan portfolio in the state of Andhra Pradesh will be at 12% for the year 2011-2012 only. Thereafter they have to maintain CRAR at 15%.

• Asset Classification and Provisioning Norms:

W.e.f.01.04.2012 all NBFC-MFIs shall adopt the following norms (till then they shall follow the norms given in the Non-Banking Financial (Non-Deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007).

Asset Classification Norms:

• Standard asset – an asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;
• Non-performing asset – an asset for which, interest/principal payment has remained overdue for a period of 90 days or more.

Provisioning Norms:

• The aggregate loan provision at any point of time shall not be less than the higher of
  

  a) 1% of the outstanding loan portfolio or
  b) 50% of the aggregate loan installments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan installments which are overdue for 180 days or more.

  All other provisions of the Non-Banking Financial (Non-Deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 will be applicable to NBFC-MFIs except as indicated therein.

• Pricing of Credit
• All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12%. The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets.
• Interest on individual loans will not exceed 26% per annum and calculated on a reducing balance basis.
• Processing charges shall not be more than 1 % of gross loan amount. Processing charges need not be included in the margin cap or the interest cap.
• NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges where recovered, shall be as per IRDA guidelines.
• Fair Practices in Lending
  • Transparency in Interest Rates
    • There shall be only three components in the pricing of the loan viz., the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof).
    • There will be no penalty charged on delayed payment.
    • NBFC-MFIs shall not collect any Security Deposit/ Margin from the borrower.
    • There should be a standard form of loan agreement.
    • Every NBFC-MFI should provide to the borrower a loan card reflecting
      1. the effective rate of interest charged
      2. all other terms and conditions attached to the loan
      3. information which adequately identifies the borrower and
      4. acknowledgements by the NBFC-MFI of all repayments including installments received and the final discharge.
      5. All entries in the Loan Card should be in the vernacular language.
  • The effective rate of interest charged by the NBFC-MFI should be prominently displayed in all its offices and in the literature issued by it and on its website.

• Multiple-lending, Over-borrowing and Ghost-borrowers
  • NBFC-MFIs can lend to individual borrowers who are not member of Joint Liability Group (JLG)/Self Help Group (SHG) or to borrowers that are members of JLG/SHG.
  • a borrower cannot be a member of more than one SHG/JLG.
  • not more than two NBFC-MFIs should lend to the same borrower.
  • there must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first installment. The moratorium shall not be less than the frequency of repayment. For eg: in the case of weekly repayment, the moratorium shall not be less than one week.
  • recovery of loan given in violation of the regulations should be deferred till all prior existing loans are fully repaid.
  • All sanctioning and disbursement of loans should be done only at a central location and more than one individual should be involved in this function. In addition, there should be close supervision of the disbursement function.
• Non- Coercive Methods of Recovery
  • NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment, training and supervision of field staff. The Code of Conduct should also incorporate the Guidelines on Fair Practices Code.
  • Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.
  • All other elements of the Fair Practices Code issued for NBFCs vide CC No 80 dated September 28, 2006 as amended from time to time shall be adhered to.
• Corporate Governance

The Master Circular issued for NBFCs on Corporate Governance vide CC No. 187 dated July 01, 2011 shall be applicable to NBFC-MFIs also.

• Improvement of Efficiency

NBFC-MFIs shall review their back office operations and make the necessary Investments in Information Technology and systems to achieve better control simplify procedures and reduce costs.