What is an NBFC MFI?

• An NBFC MFI is a non-deposit taking NBFC with a minimum Net

Owned Funds (NOF) of Rs. 5 crores (Rs. 2 crores for those registered
in the North Eastern Region of the country) and having at least 85% of
its net assets as “qualifying assets”.
What is the process of NBFC registration?
• Apply online at the official RBI portal for the NBFC Registration. A set
format is prescribed, to be downloaded from the website. The
application should be accompanied by the documents in support of the
application. On submission, a reference number, CARN, gets generated.
• Submit the hard copies of the application and the documents that were
uploaded on the portal, to the Regional Office of RBI.
• After validating the submitted application, the regional office forwards the
application to the Central office of RBI.
• They carefully examine the application and the documents. If all the terms u/s
45-I A of RBI Act, 1934 are being fulfilled then the NBFC certificate will be
granted.
What documents are required to apply for an
NBFC license?
• Documents of the administration of the company.
• Certificate of Incorporation of the Company.
• MoA and AoA.
• Address proof of the company.
• Detailed information about Directors or Partners of the Company.
• Well-audited accounts of the company for at least the past 3-consecutive years.
• Board Resolution approving the establishment of NBFC.
• Bank Account where the paid-up equity share capital of at least Rs. 2 Crore, is deposited.
• Latest KYC.
• Net worth certificate.
• Clean banker’s report.
• Other relevant documents on required by the authority
• NBFCs and NBFC MFIs are directly regulated by RBI for microfinance
operations where the quantum of overall lending to the borrower, the
number of providers for each borrower, rate of interest, additional
charges are stipulated by RBI.

• In simpler term, a borrower can be a member of one Self Help Group

or Joint Liability Group; the borrower can borrow up to Rs. 1,25,000
from 2 NBFC MFIs as a member of Self Help Group or Joint Liability
Group or in his individual capacity.

• The rate of interest is also calculated as per quarterly calculations of

RBI; processing fees and loan protection insurance premium can be
charged from the borrowers.
• NBFC MFI is a non-deposit taking NBFC (other than a company licensed
u/s 25 of the Indian Companies Act, 1956) that meets the following
conditions:
• Minimum Net Owned Funds (NOF) of Rs.5 crore. (For those registered in
the North Eastern Region of the country, Rs. 2 crores is required as
minimum NOF).
• At least 85% of its Total Net Assets are in the nature of “Qualifying Assets.”
• An NBFC, not qualifying as an NBFC MFI, is not to extend loans to the
micro-finance sector, which, in aggregate, is more than 10% of its total
assets.
• The only difference between an NBFC MFI meaning and other 
NBFC meaning is that while other NBFCs can operate at a very high level
but MFIs cater to only the smaller level of social strata, with the need of
smaller amounts as loans.
Net Assets of NBFC MFI
• Only the assets originated on or after January 1, 2012, will have to
comply with the Qualifying Assets criteria. Those existing as of
January 1, 2012, are reckoned towards meeting both the Qualifying
Assets criteria as well as the Total Net Assets criteria.

• These assets have been allowed to run off on maturity and cannot be
renewed. (Restructured in line to revised guidelines)

• “Net assets” are total assets excluding cash, bank balances, and

money market instruments.
Qualifying Assets of NBFC MFI
Qualifying assets” are loans that meet below specifications:
• Loan disbursed by an NBFC MFI to a borrower with a rural household annual
income not more than Rs. 1,25,000 or urban & semi-urban household income
not exceeding Rs. 2,00,000,
• Loan amount not more than Rs. 75,000 in the first cycle and Rs. 1,25,000 in
subsequent cycles,
• The borrower does not owe more than Rs.1,25,000 in total. To calculate the
total indebtedness of a borrower, any loans taken to fulfill education and
medical expenses shall be excluded,
• For a loan of Rs. 30,000 or more, the duration of the loan should not be less
than 24 months, with prepayment without penalty,
• Loan to be extended without any security or collateral,
• The loan is repayable on weekly, fortnightly, or monthly installments,
as chosen by the borrower,
• The aggregate amount of loans, given for income generation, is not
less than 50 % of the total loans given by the MFIs. The remaining
part of the aggregate amount of loans may be extended for other
purposes such as housing repairs, personal expenses, education,
medical, or other emergencies,
• The income derived from the balance of 15% of the Qualifying Assets
shall be in accordance with the provisions provided specified for it.
Net Owned Funds (NOF)
Character & Evolution of MFI
Unit 2
MFI in Indian Context
• Indian microfinance is extremely complex.

• There are different legal forms active in the markets i.e. Banks
(commercial, Cooperative Banks, RRBs, SFBs etc), NBFCs, NBFC MFIs,
U/S 8 companies, societies, trusts, cooperatives etc.

• NBFC and NBFC MFIs are "For Profit" segment and U/S 8 companies,
societies, trusts, cooperatives are "Not-For-Profit" segment.

• There are diverse models, Self Help Groups, Joint Liability Groups,
Individual, Limited Liability JLGs, etc.
• There is no uniform regulation for the microfinance sector
(i.e. NBFC and NBFC MFIs are directly regulated for microfinance operations;
u/s 8 companies are finance companies operate with the special dispensation
of not to register with RBI; Societies, Trusts, Cooperatives Societies)

• Priority Sector Lending: Banks are regulated but do not come under the
direct regulation for microfinance operation i.e. do not have to follow the
guidelines for NBFC and NBFC MFIs. 

• Despite agencies with different legal forms having financial operations, only
NBFCs NBFC MFIs and Banks (cooperative banks are not submitting
microfinance portfolio) are entitled to upload borrower level data on CIBs.
Point to be noted over here all these institutions are working in the same
geographies and the poor people can be a member of all of these groups.
 Shadow Banking
• Shadow banking is a term used to describe bank-like activities
(mainly lending) that take place outside the traditional banking
sector. It is now commonly referred to internationally as non-bank
financial intermediation or market-based finance.

• Shadow bank lending has a similar function to traditional bank

lending.
(Source: https://youtu.be/0Wm6mclHyv0)
• Stipulations are through "Qualifying Asset" norm of RBI for the
microfinance sector.
• In the microfinance sector, NBFC/NBFC MFIs and u/s 8 companies are
qualified, by virtue of the definition of "credit institutions" of Credit
Information Company (Regulation) Act to upload the borrower level
data on Credit Information Bureau. 
 Client Outreach
• The total number of clients served by MFIs excluding 6 Small Finance Bank (SFBs) stood
at 295 lakh as on 31 March, 2017. In 2015-16, six SFBs alone had 130 lakh clients out of
total client of 399 lakh.
• Number wise client outreach in 2016-17 has declined to 295 from 399 lakh but actually
there is a growth of 10% (factoring in 6 SFBs’ exit as an MFI).
• Client outreach of MFIs had grown substantially from 2005 to 2011, reaching a level of
317 lakh. This trend slowed down during 2012 and 2013 and the number of clients
slumped to 275 lakh.
• The trend reversed in 2014 with a growth and reached a level of 330 lakhs. This trend
continues in 2016 with a huge rise in clients/ borrowers to an all-time high of 399 lakh.
• Majority of these clients are being served by NBFCs (NBFC/ NBFC-MFIs) 79% whereas
Section 8 Companies account for 5% and Others (Society/Trust/MACS) account for 16%.
• MFIs with outstanding portfolio above `500 crore are responsible for reaching out to
80% of the clients in the industry.
Rural – Urban Share of MFIs Borrowers
• 2014-15 can described as watershed year as far as the rural-urban
divide in Indian microfinance is concerned. Hitherto Indian microfinance
was touted as basically a rural phenomenon as compared to
microfinance in Latin America as also in large parts of Africa and Asia.
• A very interesting trend is seen in the rural-urban focus of MFIs. The
share of rural clientele which was 69 % in 2012 decreased to 56 % in
2014 and has drastically come down to 33 %.
• The proportion of rural to urban clients for the year 2014-15 is 33% to
67%. In the year 2015-16, there was a slight improvement in the share
of rural clientele which increased to 38% because of exclusion of
Bandhan.
• In 2016-17, the trend of rural to urban is the reverse of trend of 2015-16
because of exclusion of 6 SFBs. One of the key findings from our
research shows that small sized of MFIs are rural centric.
Outreach to special segment of borrowers
(Women, SC/ST, and Minorities)
Active Micro-lenders
Loan Portfolio Outstanding Across
States/UTs – 2017 & 2016 (Decreasing
Order)
Pricing of Credit
• The margin cap for all NBFCs, irrespective of their size, must not
exceed 10% for large MFIs (loan portfolios over Rs.100 crore) and 12%
for the others.
• The interest rates charged by an NBFC MFI to its borrowers is to be
the lower of:
• The cost of funds plus the margin (10% or 12% as mentioned above), or
• The average base rate of the 5 largest commercial banks by assets multiplied
by 2.75. This rate shall be advised by RBI on the last working day of the
previous quarter, which shall determine interest rates for the ensuing quarter.
• NBFC MFI will ensure that the average interest rate on loans during a
financial year (FY) does not exceed the average borrowing cost during
that FY plus the margin, within the prescribed cap.

• Further, while the rate of interest on individual loans may be more than 26%,
the maximum variance permitted for individual loans between the minimum
and maximum interest rate cannot be more than 4%.

• The average interest paid and charged by the MFI is to be calculated on

average monthly balances of outstanding borrowings and loan portfolios
respectively.

• The figures to be certified by Statutory Auditors, annually, and also disclosed

in the Balance Sheet.
Fair Practices Code in Lending
Transparency in Interest Rates:
• The pricing of the loan should include only 3 parts. The interest
charge, the processing charge, and the insurance premium (inclusive
of the administrative charges).
• No penalty will be charged on delayed payment.
• No Security Deposit to be collected from the borrower.
• The form of the loan agreement has to be standardized.
• Every borrower must be provided a loan card with:
• the effective rate of interest charged,
• all other terms and conditions attached to the loan,
• the information which identifies the borrower, and
• acknowledgments by the NBFC MFI of all repayments including installments
received and the final discharge,
• The entries in the Loan Card to be made in the local language.

• The effective rate of interest charged on loans should be prominently

displayed in all offices and on the website of the NBFC MFI.
Multiple-lending, Over-borrowing &
Ghost-borrowers
• NBFC MFIs can lend to individual borrowers whether they are members of the
Joint Liability Group(JLG)/Self Help Group(SHG).
• A borrower must not be a member of more than one SHG/JLG.
• The same borrower not be financed by more than 2 NBFC MFI.
• The interim time between the grant of the loan and the due date of the first
installment should not be less than the frequency of repayment.
• Recovery of loans given not following the regulations to be suspended till all
prior existing loans are repaid wholly.
• All sanctioning and disbursement of loans should be done only at a central
location and more than one individual should be involved in this function. With
the disbursement function to be closely supervised
Necessary Compliances 
• RBI mandates every NBFC MFI has to become a member of at least
one Credit Information Company (CIC) established under the CIC
Regulation Act 2005. Provide timely and accurate data to the CICs and
use the data available with them to ensure compliance with the
conditions regarding membership of JLG/SHG, level of indebtedness,
and sources of funds. Such membership will ensure compliance with
most of these conditionalities.
Methods of Recovery
• NBFC MFIs shall ensure that the Fair Practices Code is followed while
recruitment, training, and supervision of field staff.

• Recovery should be non-coercive and be made only at a central

designated place. If the borrower fails to come to the central
designated place on 2 or more successive occasions, then field staff
shall be allowed to recover the loan.
• Corporate Governance
The Master Circular of July 01, 2015, issued for NBFCs on Corporate
Governance, applies to NBFC MFIs also.

• Improvement in Efficiency
The backend and back-office operations of the NBFC MFI and update
their Information Technology and systems to simplify procedures,
achieve better control, and reduce costs.
Channelizing Agents for Schemes operated
by various Government Agencies
• The department of channelizing agents shall be considered as a
separate business segment. These loans shall not be included for
ascertaining the minimum qualifying assets criteria of 85%.
• The interest on such loans not to be included while calculating the
difference between the maximum and minimum interest rates.
• Cost of such funds not to be considered while ascertaining the
average cost of funds or the interest rates charged to borrowers.
• Proper accounts and records for such loans as well as funding from
concerned agencies shall be maintained by the NBFC MFI. Separately
disclosed in the financial statements.
• The asset classification, income recognition, provisioning norms, and
other prudential norms, as applicable to NBFC MFIs, apply here as
well. Except when the NBFC MFI does not bear any credit risk.
• All such loans to be reported to CICs to restrict multiple borrowings of
a borrower.
Major risks facing microfinance in India
• Credit risk
• Market risk
• Operational risk