Three-lender cap rule for microfinance from April 1, further stress likely in short term

This move is likely to escalate the pain for both lenders and borrowers immediately, although the rule should bring credit discipline back in the long run, industry captains said.
«The three-lender cap rule will bring discipline among lenders and also borrowers,» said Manoj Kumar Nambiar, chairman of Microfinance Institutions Network, a self-regulator for the sector.

«There may be a bit of short term impact but this will be good in the medium to long term,» said Nambiar, who is also the managing director at Arohan Financial Services.
About 4.5 million micro borrowers, or nearly 5.3% of the total 84 million microfinance borrowers took loans from more than three lenders as of December last year.

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On a granular level, about 8% borrowers of Bandhan Bank also took loans from three other lenders. For IndusInd Bank, the ratio was 14%.

With the new rule, overleveraged borrowers will find their source of funds drying up, which may lead to fresh defaults and cause further deterioration of asset quality for lenders in the short run.

«Rejection to fresh doses of loans could further rise with the stricter rule in place in the short term,» Spandana Sphoorty Financial managing director Shalabh Saxena said.

This will lead to a rise in portfolio risk since borrowers are already facing tight liquidity to run their businesses, said Janakalyan Financial Services managing director Alok Biswas. For several micro borrowers, the loans serve as working capital.

The three-lender cap rule was initially planned from