Credit Appraisal, Microfinance and Small Business Lending
What the exam tests
How an SFB underwrites borrowers without audited accounts: the microfinance rules, household cash-flow logic, small-business working capital and the appraisal framework.
Core rules (RBI Microfinance Directions, 2022, effective 1 April 2022)
- A microfinance loan is a collateral-free loan to a household with annual household income of Rs 3 lakh or less, whatever the delivery mode and end-use.
- No collateral and no security deposit. Repayment frequency is the borrower's choice (at least monthly, or at least fortnightly for shorter tenures).
- No pre-payment penalty. The all-inclusive interest rate, including processing fees, must be disclosed in a factsheet and loan card.
- FOIR ceiling: across all lenders, monthly repayment obligations cannot exceed 50% of monthly household income; the board must approve an income-assessment method.
- Small business: for working capital within the small-limit threshold, the turnover method gives a working capital gap of 25% of projected turnover, funded 5% by the borrower and 20% by the bank. CGTMSE cover supports collateral-free MSE lending.
Worked example
An MSE projects turnover of Rs 1.2 crore and seeks a Rs 30 lakh limit. Turnover method: gap = 25% of Rs 1.2 crore = Rs 30 lakh; borrower margin 5% = Rs 6 lakh; bank finance 20% = Rs 24 lakh. The Rs 30 lakh request exceeds the method's Rs 24 lakh by Rs 6 lakh, so it must be supported by a separate cash-flow assessment or scaled down.
Marks-losing traps
Applying a collateral or audited balance-sheet test to microfinance; quoting an FOIR ceiling other than 50%; ignoring processing fees when stating the rate; treating the Rs 25 lakh size norm as a PSL category; using turnover-method figures without the 5/20 split.