MFIN Releases Guidelines to Strengthen Underwriting of Microfinance Loans

The Microfinance Industry Network (MFIN) has released guidelines on underwriting microfinance loans for a more accurate assessment of the monthly repayment obligations of the borrowers. The RBI recognized a self-regulatory body in its press release and highlighted the role of the microfinance sector in serving low-income borrowers, i.e., below annual household income of 3 lacs. It pointed out the additional responsibility of the lenders operating in the sector in guarding against over-indebtness owing to the specific borrower profile

The existing RBI regulations mandate that monthly repayment obligations must not exceed 50% of the monthly household income and while lenders rely on credit reports for estimating outflows, an accurate estimation faces two hurdles. One being the lack of EMI value data and the other being no monthly outflow value in case of bullet repayment, such as in case of gold loans or Kisan credit cards.

To bring about uniformity in such cases and to help proper compliance with RBI regulations, these guidelines were issued to assist Regulated Entities in having a robust underwriting policy in dealing with cases of missing EMIs and bullet repayments.

The network had earlier recommended that micro-credit indebtedness for every borrower should be limited to Rs 2 lakh with just a maximum of four lenders providing the loan. In July 2024, MFIN members also agreed to introduce additional guardrails to strengthen processes and enhance borrower protection amid concerns of deteriorating portfolio quality.