The new rule, i.e., the three-lender cap rule, will be available for micro-lenders, including banks and non-banks and will be applicable from April 1, 2025.
Nidhi | Apr 1, 2025 |
The new rule will restrict the borrowers to just a few lenders. MFIN (Microfinance Institutions Network) had introduced in August last year a four-lender cap restricting borrowers to four lenders after it found high debt levels to be resulting in defaults. This limit aims to prevent Excessive borrowing. However, this measure is expected to increase the financial strain on both lenders and borrowers in the short term.
The new rule, i.e., the three-lender cap rule, will be available for micro-lenders, including banks and non-banks and will be implemented from April 1, 2025.
As per the three-lender cap rule, a borrower is restricted to obtaining loans from no more than three lenders. Experts say that the rule will bring credit discipline in the long run.
As per an expert, the three-lender cap rule will restore discipline among lenders and borrowers. In the short term, this rule is expected to cause some challenges. However, in the medium and long term, the rule will bring positive outcomes.
According to a report, around 5.3%, or approximately 4.5 million microborrowers out of the total 84 million microfinance borrowers, had borrowed loans from more than three lenders as of December last year. Approximately 8% of borrowers of Bandhan Bank also took loans from three other lenders. On the other hand, the ratio was 14% for IndusInd Bank.
Due to the new rule, borrowers who have too much debt will find it difficult to get loans from different sources, which could lead to more defaults and worsening loan quality for lenders in the short term.
As per experts, the stricter rule will likely result in more loan rejections in the short term, and this could increase portfolio risk as many borrowers are already struggling with tight liquidity to manage their businesses. For several micro-borrowers, these loans act as working capital, which they use for their day-to-day operations.
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