Sa-Dhan offers a uniform tool for assessing the income of microfinance borrowers


Sa-Dhan, a self-regulatory body in the microfinance industry, in its recommendations to the Reserve Bank of India (RBI), called on the central bank to introduce a uniform mechanism for assessing borrower income, which can be used by all lenders in the space.

In its advisory paper last month, the RBI said all regulated entities should have a board-approved policy in place listing the factors considered in assessing household income. Sa-Dhan said he developed a credit scoring tool to help the industry get accurate income assessments.

Many experts said it was a positive decision by the RBI not to prescribe a common structure for income assessment and instead leave it to individual organizations to do their own assessment. From a borrower’s perspective, the good thing is that family income will be calculated, not individual income.

Sa-Dhan also recommended that a “ration card” be used as the basis for identifying a household in case it is a migrant worker. According to RBI, the definition of household, which it derives from the National Sample Survey Office, is a group of people living normally together and taking food from a common kitchen that will constitute a household.

Sa-Dhan said that although migrant workers would not live together and use a common kitchen, they do contribute to household income. “Therefore, excluding these members will give an incorrect estimate of household income.”

However, about 19 percent of the rural population and 33 percent of the urban population do not have a ration card. “In case the ration card is not available, Aadhar should be allowed as an ID for such cases. This is necessary because microfinance institutions may have the discretion to draw conclusions about what a family is (in the absence of a ration card), ”they said.

He also recommended that the income limit of rural and urban households be the same at Rs 2 lakh per year for them to be identified as a microfinance borrower. According to RBI standards, a microfinance borrower is identified by the annual household income not exceeding Rs 1.25 lakh for rural areas and Rs 2 lakh for urban and semi-urban areas.

The RBI, in its advisory document on the microfinance sector, proposed to lift the cap on interest rates for microfinance institutions (MFIs) so that there is no arbitrage for certain players in the microfinance market. sector. He also proposed a ceiling on the debt-to-income ratio and said loans should be made in such a way that the interest payment and principal repayment for any outstanding loans of a household at any one time should not cross over. 50 percent of the household. Income. This debt income cap, according to the RBI, would avoid the need for multiple restrictions that only MFIs face.

Sa-Dhan, in his recommendations, said income limits should be linked to inflation so that they can be timely revised on a regular basis, once every 2-3 years.

Among other things, he asked the RBI to lower the “qualifying asset test” or include a sub-segment in the definition of microfinance for mature borrowers. “This is for those whose annual income is between 2 and 5 lakh rupees and who wish to switch to larger loans to set up micro-businesses and access credit for affordable housing. Using total household disposable income calculated from cash flows in the income assessment format.

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