The MFIs should move towards making the PAN Card the first ID for KYC and credit bureau reporting
Mirco Finance Institutions (MFIs) have agreed to implement revised guidelines from June 1 to address the issue of pricing, over indebtedness and discipline.
“The association holds that stronger guidelines should be introduced for lending institutions to safeguard the microfinance sector and, in particular, its clients. Three major concerns require urgent attention,” Jiji Mammen, ED & CEO at Sa-Dhan said.
Sa-Dhan is an association of Impact Finance Institutions and an RBI appointed Self-Regulatory Organization (SRO) for Microfinance Institutions.
These additional guidelines were discussed during the conference of CEOs of MFIs and other institutions. “The revised guard rails, or SANKALP 2.0, will be applied from June 1st, and members are advised to follow them scrupulously,” a statement issued after the meeting said. Sa-Dhan has about 220 members working in 33 states/UTs and over 646 districts, which includes both, for Profit and Not for Profit MFIs, SHG promoting institutions, banks, rating agencies, capacity-building institutions etc.
Revised guidelines are categories under three heads — pricing, over indebtedness and discipline.
Under the head ‘Pricing of Loans,’ it has been said that lending Institutions should follow transparent practices when pricing loans.
Components of the rate of interest (CoF, Opex cost, Risk Margin and Margin) should be well defined and in compliance with guidelines issued occasionally. The Rate of Interest should be justifiable and approved by members of the Board. “Processing fee to be capped at 1.5 per cent (excluding applicable taxes),” guidelines said.
Talking about ‘over indebtedness’, it has been said that the number of lenders for microfinance loans shall not exceed 3 from all types of lenders.
“When considering a fresh loan, households with a combined exposure in microfinance and retail loans shall not exceed ₹2 lakhs, keeping all the guidelines, including the repayment obligation limit of 50 per cent of monthly household income, prescribed by the RBI,” the guidelines said.
Further, no fresh loan to be given to the same borrower, whose existing loan is still continuing as outstanding, before 12 months of disbursement of the existing loan or has not completed 50 per cent repayment of the same.
“Every microfinance loan should mandatorily do a comprehensive credit bureau check at the household level. A credit bureau report for the client and spouse / co-applicant is also mandatory to check on retail and microfinance loan obligations,” the guidelines said.
Under the ‘Code of Conduct and Discipline’, it has been agreed upon that to enforce repayment discipline among clients, no loan should be given to any client who is in default of any amount due for more than 60 days with any lender, and the total outstanding such loan exceeds ₹3,000.
The MFIs should make PAN Card the first ID for KYC and credit bureau reporting. An aspirational level of 30 per cent coverage through PAN may be attempted by the end of this FY on a Best-Effort Basis. “The end use of loans is to be verified to ensure proper utilization of loans for the requested purpose,” the guidelines said.
According to the statement, in order to check the attrition rate among entry-level staff and to prevent fraud incidents, it is mandatory to do employee bureau checks for each staff member before hiring.
Any staff hired from the microfinance industry should only be given three months to produce a relieving letter; services should be discontinued without it. At the same time, lending institutions should not withhold the relieving letter of any staff member without any justifiable reason, it said.
Published on April 28, 2025
