Arohan Financial Services Limited | Annual Report 2021-22

Summary of the new guidelines is as follows: Each Regulated Entity shall have a Board approved policy for: • Household income assessment based on the household profile • Capping the payment of interest and principal repayment for all outstanding loan obligations of the household as a %age of household income (subject to a limit of maximum 50%) without any limitation on type of usage of the loan • Determining rate of interest charged for all loans/advances considering the cost of funds, margin, and risk premium • Periodicity of Repayments The assessed income of the household should be reported to Credit Information Companies (CIC) for every customer Qualifying Asset for an NBFC-MFI should be minimum 75% Outsourcing of any activities including use of recovery agents is allowed The minimum, maximum and average interest rate charged on microfinance loans should be displayed in all offices of the lending institutions, and all fee details to be charged from the customer must be explicitly mentioned in the factsheet Exemptions from Sections 45-IA3, 45- IB4 and 45-IC5 of the RBI Act, 1934 have been withdrawn for those ‘not for profit’ companies engaged in microfinance activities that have asset size of INR 100 Cr and above The new guidelines will help to reduce the probability of over indebtedness of microfinance borrowers (and their household) as it has mandated to derive the household income (as per board approved policy of the organization) and to cap themaximum loan size for disbursement so that the total EMI burden across all loans (no restriction on loan usage) for the household is under 50% of income assessed. The Lending Entity also needs to share the derived income of the household to the credit bureaus. Additionally, the income limit of the customer for microfinance loan, which was revised last in Fiscal 2020, has been updated to INR 3 lakhs for the household. With withdrawal of loan usage criteria, the qualifying assets now can accommodate other loan products including affordable housing, home improvement, vehicle loan, and green product loans. These changes will increase the outreach of microfinance industry to the larger section in the bottom half of the pyramid, thus increasing the market size of the overall industry. In the previous RBI’s master direction, NBFC- MFIs (with portfolio size > INR 100 Cr) were restricted to lend at a maximum of 10% margin cap above the cost of their fund. This criterion has also been withdrawn in the new guidelines, allowing a risk-based pricing for customers in linewith industry practices, which is being currently followed by other Financial Institutions (Banks & NBFCs) in different product segments. Thus, this also promises to improve the sustainability and viability of the companies operating in the microfinance industry, in the long run. The new guideline also emphasizes on sharing all information about the interest rates, as well as any deductions from the sanctioned loan amount on the websites or branch premises of the lending entities, along with customers’ loan card respectively. This will help the customers to understand effective interest rate on the loan being taken and compare the same with different entities to make a uniform decision. Overall, the new guidelines provide a level playing field for all entities, increase the addressable market size and bring more information/disclosures for the benefit of microfinance customers. 47 Annual Report | 2021-2022 Management Discussion & Analysis