Speaking to CNBC-TV18, Alok Misra, CEO & Director of MFIN clarified that the postponement aims to allow sufficient time for financial institutions to adapt their IT systems and business rule engines to ensure seamless implementation. He underscored that the delay is unlikely to exacerbate asset quality issues or overleveraging concerns, as the change impacts only a small fraction of borrowers.
Furthermore, Misra highlighted the sector’s proactive measures, including cautious lending practices and robust underwriting standards, which mitigate systemic risks even in a challenging liquidity environment.
Below is the verbatim transcript of the interview.
Q: Could you first confirm to us whether you have deferred this by three months and also could you elaborate on the rationale behind this move because the announcement was made just last month?
Misra: Let me put the things in perspective. When we issued the guardrail 2 in November, it had seven covenants from underwriting to KYC to lender cap which were adopted by the industry. Now, out of the seven covenants, only one that is the lender cap from four to three, that has been deferred instead of 1st January to 1st April. All the other six are going ahead from 1st January. Only one is being deferred.
If you remember, in August, we had issued the guardrail 1.1. In that, we had capped the lenders to four. What we got from the field after we issued the guardrails and from the feedback from the institutions, the regulated entities, was that the changes to the IT systems the business rule engines and all that takes time. And to do it right now on from 1st January, when they have already done one major change in August and September, that would be a little troublesome and can create some problems in implementation in the field. So that’s why we have given some time, that is three months, and from 1st April it will be on. All other six covenants from underwriting to KYC and reporting to credit bureaus and all that, whatever was there in the guardrails, that kicks in from 1st January. So, no major change.
Q: You are saying that because of various reasons you have pushed it down by close to around three months. The fear though is, that the January-March quarter (Q4FY25) could be very, very good for some of these lenders in terms of growth. But on asset quality there is a bit of a worry that’s looming. Aren’t you worried about that?
Misra: What the field reports which we are getting for December, though I am yet to get the credit bureau data. In December, there is marked improvement in the collection’s efficiency. The quality is getting better. Second, when you say that if we postpone it by three months, it will lead to some more asset quality issues, it is not so, because the lenders of their own, because of the credit quality issues and the liquidity drying up for NBFC MFIs to a large extent are already going a little bit slow in disbursement and they are already cautious.
Third, the guardrails when we bring it down from four to three lenders, that only affects hardly 2.5-2.8% of borrowers. That’s not significant. So, I don’t think three months is going to make any change in the level of asset quality.
Q: Overleveraging still remains a key concern in the microfinance sector, how will that get addressed by deffering by three months? And as you said, the proportion is really small, but the pain is very huge. If you take a look at the asset quality of lenders over the last six months, or especially in the first half, has deteriorated massively, and they have guided for further deterioration in asset quality as well. And we are hearing about news reports of frauds that have been happening. So how will the quality of loans get improved if at all the guardrails would have been placed today versus deferment by three months?
Misra: I don’t agree with your last part of the statement, that is frauds and news reports and all that. We get constant field reports from the field, I have not heard of any fraud, minor or major, number one. Let me put that on record. Second, when you talk about over leveraging, over leveraging in the microfinance sector, which is at present of ₹4,00,000 crore, including banks, SFBs, NBFCs, and NBFC MFIs, it’s a very small part of the total financial sector in India, which is around ₹170 lakh crore. Still, the number of rules which we apply and the number of precautions which we take in underwriting are enormous compared to the other sectors.
If microfinance clients, part of it, that is 5%-6% get overburdened, it is not only in the microfinance, because microfinance gets the blame because they are primarily our client, but there are other lenders who have no restrictions getting into our segment and lending to the microfinance client, that is the retail overlap and other things. That is also a cause of overlending. So, we, in our underwriting, because we cannot do anything about it, so what we do is we are trying to cap the space for microfinance as much as possible for us to do that. And that should bring down the overleveraging concerns in 5% to 6% of clients. Other than that if we defer the lender cap from 4% to 3%, it was going to affect say, 3% of clients. And in the situation when the liquidity is tight and you say credit quality concerns are there, institutions have already taken steps to strengthen their underwriting. They are not going to lend indiscriminately, and they already have a liquidity shortage. And two and a half months to three months delay, I don’t think that’s going to cause any extra concern on the asset quality.
Q: If you remember some time back there was a cap with respect to the spreads that a microfinance lender could earn. Now that cap has been removed and lenders are free to charge their customers. Do you agree or do you concur with the fact that putting back the cap on the spreads that a lender can make that would also lead to some kind of improvement in this system?
Misra: No, you are confusing two things – over leveraging and interest rates. Over leveraging is a different part and interest rate is a different aspect. Now coming to interest rates, in 2022 the interest rates were deregulated that was only for 35% of the sector which is NBFC MFI. The 65% percent of the sector was all already deregulated, it was never under interest rate cap. Only thing which RBI did in 2022, that for 35% of the sector, which is NBFC MFI it levelled the playing field.
And when you say deregulated also, deregulated doesn’t mean that it is free for all. Deregulated means that you have to have a well-defined board approved policy, which is subject to RBI’s regulatory scrutiny. And that is where you would have seen that the interest rate, despite the deregulation, have remained range bound. And if you compare with other sectors who are lending in the similar segment, they remain the lowest still.
