What changed
RBI created a separate NBFC category called NBFC-MFI, distinct from existing categories like Asset Finance Company and Loan Company. It defined NBFC-MFI as a non-deposit taking NBFC (excluding Section 25 companies) with minimum net owned funds of Rs 5 crore (Rs 2 crore for North Eastern Region) and at least 85% of net assets as qualifying assets. Qualifying assets are loans to borrowers with rural household income up to Rs 60,000 or urban/semi-urban income up to Rs 1,20,000, with loan caps of Rs 35,000 (first cycle) and Rs 50,000 (subsequent cycles), total indebtedness not exceeding Rs 50,000, minimum tenure of 24 months for loans above Rs 15,000, collateral-free, and at least 75% of total loans for income generation.
What it means for you
NBFCs engaged in microfinance must now comply with specific prudential norms and asset composition requirements to retain NBFC-MFI status. This formalizes regulatory oversight of the microfinance sector, ensuring loans target low-income households with caps on loan size and borrower indebtedness, and that at least 75% of loans are for income generation. Banks and lenders dealing with NBFC-MFIs need to verify compliance with these new definitions and thresholds for their counterparty risk assessments. Separate guidelines on industry association monitoring will follow.
What you must do
- Review your NBFC portfolio to identify entities that may qualify as NBFC-MFIs under the new definition.
- Ensure NBFC-MFI borrowers meet the 85% qualifying asset threshold (net assets excluding cash, bank balances, and money market instruments) and net owned fund requirements.
- Update internal credit policies to reflect the new loan caps, income limits, collateral-free requirement, and the condition that at least 75% of loans must be for income generation.
- Monitor borrower indebtedness to ensure it does not exceed Rs 50,000 per borrower.
- Prepare for separate guidelines on industry association monitoring of NBFC-MFI compliance.
Who it affects
All NBFCs (excluding RNBCs) engaged in microfinance, Banks and lenders with exposure to NBFC-MFIs, Regulatory compliance teams at NBFCs
What is the minimum net owned fund requirement for an NBFC-MFI?
The minimum net owned fund is Rs 5 crore, except for NBFC-MFIs registered in the North Eastern Region, where it is Rs 2 crore.
What are the key conditions for a loan to be a qualifying asset?
The loan must be to a borrower with rural household income up to Rs 60,000 or urban/semi-urban income up to Rs 1,20,000; loan amount capped at Rs 35,000 (first cycle) or Rs 50,000 (subsequent cycles); total borrower indebtedness not exceeding Rs 50,000; tenure at least 24 months for loans above Rs 15,000; loan must be without collateral; and at least 75% of total loans must be for income generation.
Does this circular apply to all NBFCs?
The circular is addressed to all NBFCs excluding RNBCs, but the Directions specifically define and apply to NBFC-MFIs that meet the conditions.