India’s RBI Eases Regulations for Non-Bank Microfinance Lenders

India’s central bank eased norms for non-bank microfinance companies, removing a cap on lending rates and relaxing risk-provision standards, after some lenders found it difficult to meet existing regulations.

Non-bank microlenders must keep their average loan rates within a year at a fixed margin over average borrowing costs, the Reserve Bank of India said in a statement placed on its website late yesterday, scrapping an earlier limit of 26 percent. The maximum difference over funding costs shouldn’t exceed 10 percent for large microfinance firms and 12 percent for the rest, according to the monetary authority.

The RBI also allowed the companies to include risk buffers provided against advances in the southern Andhra Pradesh state, which curtailed debt and waived loans to arrest a spate of farmer suicides, in their so-called net owned funds. The inclusion of such provisions should be gradually reduced over a five-year period, according to the statement.

Net owned funds of a non-bank company include its equity capital, reserves and money raised from asset sales, according to the RBI.

New non-bank microfinance firms must have a minimum of 50 million rupees ($896,861) in funds, except those in the nation’s northeast region, which need only 20 million rupees, according to the central bank.