NBFC – Microfinance Institution (NBFC-MFI) in India

Introduction

www.carajput.com; NBFC-MFI

www.carajput.com; NBFC-MFI

An NBFC – Microfinance Institution (NBFC-MFI) is a non-deposit taking NBFC (which is not a company licensed under Section 25/8 of the Indian Companies Act, 1956/2013) fulfilling the following conditions: One of the most emerging types of NBFC nowadays is NBFC – Microfinance Institution (NBFC-MFI).

  1. Minimum NOF of INR .5 cr. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at INR. 2 cr).
  2. Net assets of not less than 85% of which are in the nature of “qualifying assets.”

So, any NBFC proposing to carry on the business as NBFC-MFI shall fulfill the above criteria to apply for registration as NBFC-MFI with RBI.

www.carajput.com; NBFC-MFI

www.carajput.com; NBFC-MFI

Entry Point for NBFC- Microfinance Institution

For North Eastern Region, the minimum NOF limit is INR 2 Cr. Any new company proposing to get registered as NBFC – Microfinance Institution (NBFC – MFI) must have a minimum NOF of at least INR 5 Cr.

Capital Adequacy Ratio for NBFC– Microfinance Institution

Every new NBFC – MFI must maintain a Capital adequacy ratio of at least 15% of its aggregate risk-weighted assets, which shall include Tier I and Tier II Capital.

Also, it must ensure that the total of Tier II Capital shall not be more than 100% of Tier I Capital at any time.

 Assets Classification Norms for NBFC- Microfinance Institution

Non-performing asset (NPA): Asset shall be classified as NPA if either interest or principal payment becomes overdue for 90 days or more for those assets. Standard Asset: Those Assets are classified as standard assets in whose respect there is no default either in principle or interest payment and which does not disclose any problem and also those do not carry any risk other than risk attached to a business.

Provisioning Norms for NBFC- Microfinance Institution

NBFC–MFI at any point of time shall maintain an aggregate loan provision of not less than the higher of the following:

  1. 1% of the outstanding loan portfolio or
  2. 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’.

The other provisions must be made by the NBFC-MFI as per the relevant Prudential Norm applicable to the company.

Pricing of credit by NBFC-MFI

MFI Type Loan Portfolio Margin Cap
Large MFI More than 100 Cr Not exceeding 10%
Other MFI Less than or equal to 100 Cr Not exceeding 12%

Margin Cap: The margin cap for NBFC-MFI is as follows

 Interest Rates:

  • NBFC-MFI can charge the interest rates by its borrowers from the lower of the following:
  1. The fund’s cost plus margin rate; or
  2. The average base rate of the largest five commercial banks by assets multiplied by 2.75. The average of the base rates is notified by RBI on the last working day of the previous quarter.
  • Interest rates of loans given by NBFC-MFI must not exceed the average borrowing cost plus margin during that financial year.
  • The rate of interest on the individual loan may be more than 26%, but the variance in the interest rate for minimum and maximum rate for an individual loan shall not be more than 4%
  • The average interest charged by the MFI and paid on borrowings are to be calculated on average monthly balances of outstanding borrowings and loan portfolios respectively. The figures for interest rates may be certified annually by Statutory Auditors and also disclosed in the Balance Sheet.

 Insurance cost by NBFC-MFI

NBFC-MFIs shall recover only the actual cost of insurance for g life, health, group, or livestock for borrower and spouse.

Administrative charges if any, recovered, shall be as per IRDA guidelines.

Processing fees to be charged by NBFC-MFI

The Processing charges for any loan shall not exceed 1 % of the gross loan amount. Also, Processing charges must not be included in the interest cap or margin cap.

Annual Statutory Auditors Certificate Submission

The annual Statutory Auditor certificate as required to be submitted by every NBFC concerning the Company’s position as of March 31 every year, must also be submitted by NBFC-MFI, which shall also specify that the company fulfills all the conditions as prescribed to be classified as NBFC-MFI. Annual Statutory Auditors certificate Submission

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Frequently Ask Question( FAQ)

Q 1; What is the minimum NOF Required for NBFC – Microfinance institution?

Ans. The Minimum NOF required for NBFC – Microfinance institution is INR 5 Cr.

Q 2; Is there any relaxation in NOF for NBFC – Microfinance institution proposed to be registered in the North Eastern Region?

Ans. Yes, the NOF required for NBFC – Microfinance institution proposed to be registered in the North Eastern Region is INR 2 Cr.

Q 3; Is there any limit on processing fees to be charged on loans by NBFC-MFI?

Ans. Yes, the maximum processing fees that NBFC-MFI can charge is 1% of the loan amount.

Q 4 Does RBI regulate Microfinance institutions registered under section 25/8 of companies act 1956/2013?

AnsNo, those Microfinance institutions are regulated by ROC only.

CS Akshay Gupta is a diligent and innovative qualified Company Secretary, striving in matters related to Corporate Law. Akshay takes a deep interest in corporate, NBFC and FDI matters and his specialization includes corporate Compliance, FEMA Compliances, and NBFC Registration. As a Company Secretary, Akshay is passionate about matters relating to corporate funding, NBFC, and its compliances.

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