RBI Revises Qualifying Assets Criteria for NBFC-MFIs: A Welcome Move Towards Greater Flexibility and Risk Diversification

Bengaluru, June 09, 2025 – The Reserve Bank of India (RBI) has issued a circular dated June 6, 2025, revising the Qualifying Assets (QA) criteria for Non-Banking Financial Companies – Microfinance Institutions (NBFC-MFIs), reducing the requirement from “75% of total assets” to “a minimum of 60% of total assets (net of intangible assets)”. This significant policy update is expected to ease compliance challenges and enable NBFC-MFIs to serve microfinance clients more effectively while managing portfolio risks better.

The QA norm was originally introduced in 2011 when the RBI created the NBFC-MFI category, setting the QA threshold at “Not less than 85% of its net assets” wherein “Net assets” meant total assets other than cash and bank balances and money market instruments. In March 2022, the RBI revised this definition to 75% of total assets, aiming to provide flexibility and promote innovation in serving the evolving credit needs of microfinance clients. However, the change unintentionally resulted in a stricter framework, leading to frequent breaches of the norm.

Dr. Alok Misra, CEO & Director of MFIN welcoming the move said “this regulatory change demonstrates the responsiveness of the RBI to the genuine demands of the industry. This change will help NBFC-MFIs be in regulatory compliance at all times, diversify to some extent and yet retain the focus on microfinance.”

Key challenges under the previous QA norm included:

·         Liquidity management: NBFC-MFIs genetally maintain 10–15% of their total assets in cash and liquid investments. With 75% of total assets mandated for microfinance, the scope for flexibility was severely limited, especially during periods of slow disbursement, increasing the cash component further and leading to frequent breach of the QA norm.

·         Capital infusion dynamics: Fresh equity or debt raised by NBFC-MFIs temporarily inflates the liquid asset base, leading to QA breaches until the funds are deployed for lending, which takes some time.

·         Direct Assignment (DA) transactions: DA portfolios (ranging 10-15% of loan book & single transaction ranging from 3-5% of the loan assets), which are eligible QA but removed from NBFC-MFI books post-sale, distort the QA ratio andresult in technical breaches.

·         Limited scope for client graduation and diversification: The tight QA requirement left only 5–7% room for diversification, restricting NBFC-MFIs from catering to clients who have transitioned into the MSME segment or require larger ticket loans. Being the missing middle, this category is the focus of policy, but unable to get even NBFC-MFI support.

While most breaches were temporary and eventually regularized through RBI’s support, they were still viewed as covenant violations by lenders, leading to funding constraints for NBFC-MFIs.

Over the past three years, the Micro Finance Industry Network (MFIN) has been actively engaged with the RBI, advocating for a realistic and balanced QA criterion, which aligns with the policy objective of ensuring that NBFC-MFIs are focussed on microfinance and also obviate the cases of breach due to the above listed factors.

MFIN welcomes the RBI’s decision to revise the QA threshold to 60% of total assets (net of intangible assets), in line with its suggestion. This move will align regulatory intent with operational realities and support broader financial inclusion goals.

Impact of the Revised Norm: The revised 60% QA requirement is expected to:

·         Enhance compliance across NBFC-MFIs by addressing the systemic reasons behind earlier breaches.

·         Empower institutions to build a more balanced portfolio.

·         Enable NBFC-MFIs to extend their reach to the “missing middle” — through products  for clients transitioning to MSMEs, micro-housing etc.

·         Strengthen the long-term sustainability of the sector while maintaining focus on the core microfinance mission.

MFIN thanks the RBI for its consultative approach and responsiveness to industry feedback. The revised QA criteria mark a pivotal step in the evolution of India’s microfinance ecosystem.