A new rule is set to impact microfinance borrowers, restricting them from taking loans from more than three lenders. This rule will apply to microfinance institutions, including banks and non-banking financial companies (NBFCs). Initially planned for January 1, the three-lender cap rule will now be enforced from April 1.
The new three-lender cap rule is a regulation that limits how many lenders a microfinance borrower can take loans from. Starting April 1, borrowers will be allowed to borrow from a maximum of three lenders. This rule applies to microfinance lenders, including banks and non-banking financial companies (NBFCs).
Why is this rule being introduced?
The rule is meant to prevent borrowers from taking too many loans, which can lead to over-borrowing and defaults. Many microfinance borrowers take multiple loans, making it difficult for them to repay, which increases risks for lenders.
Last year, the Microfinance Institutions Network (MFIN) introduced a four-lender cap, but now the limit is being reduced to three lenders to further control excessive debt.
How will this affect borrowers?
- Limited access to loans: Borrowers who usually take loans from multiple lenders will no longer be able to do so.
- Difficulty in running businesses: Many microfinance borrowers use loans as working capital (money needed for daily business operations). With fewer options for borrowing, some businesses might struggle.
- Possible increase in loan defaults: Borrowers who are already heavily in debt may fail to repay existing loans, leading to higher default rates.
How will this affect lenders?
- Reduced risk in the long term: The rule will help lenders avoid giving loans to already overburdened borrowers, reducing overall risk.
- Short-term financial pain: In the immediate future, banks and NBFCs may see more defaults, as borrowers run out of options to refinance their loans.
- Stricter lending criteria: Banks may become more cautious about lending, which could slow down the growth of the microfinance sector.
Current Statistics
- 5.3% of microfinance borrowers (about 4.5 million people) had loans from more than three lenders as of December last year.
- 8% of Bandhan Bank’s borrowers and 14% of IndusInd Bank’s borrowers had loans from more than three lenders.
- With the new rule, many of these borrowers will be cut off from additional credit, potentially leading to financial struggles.
What Experts Say
- Manoj Kumar Nambiar (MFIN Chairman): The rule will help bring discipline among borrowers and lenders.
- Shalabh Saxena (Spandana Sphoorty Financial MD): Loan rejections will rise in the short term as borrowers face stricter limits.
- Alok Biswas (Janakalyan Financial Services MD): The rule could increase risks for lenders since borrowers are already facing cash flow issues.
