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Cost rises for micro borrowers as RBI deregulates lending rates


Borrowing costs for bottom-of-the-pyramid customers have begun to climb as the regulator removed the margin cap on NBFC-MFIs. Certain lenders have revised their lending rates upward by as much as 400 basis points as they apply risk-based pricing to arrest the asset quality degradation and the loss they suffered in the last three years. Several others are expected to follow suit, industry captains said.

“With deregulation of interest rates, we can now price for credit risk. So, a new-to-credit customer would pay slightly higher rates. But they can enjoy the benefit of lower rates after a few credit cycles if they show good credit behaviour and repayment record,” Arohan Financial Services Managing Director Manoj Kumar Nambiar told ET.

At least half-a-dozen MFIs including Arohan have revised their lending rates upward in the first week of April. They have fixed their rates 200-300 basis points higher at 23-24% per annum, excluding processing fees, industry sources said.

“Please do remember that effective median rates of deregulated entities (read universal banks, small finance banks and non-banking finance companies) was around 24% before the uniform regulations on microfinance,” Nambiar said.

Rise in incremental costs of borrowing for NBCF-MFIs is another reason behind the abrupt change in lending rates.

“Hardening of market interest rates is the real reason. Bond yields have risen to 7%,” said Sadaf Sayeed, chief executive of Muthoot Microfin.

The microfinance arm of the Muthoot Pappachan Group plans to hold a strategy meeting over the weekend and revise the rates from next Monday.

Sharper rise in lending rates is likely for new customers with no credit history as risk-based pricing will be introduced given the fact that every lender suffered huge losses during the last three years, the chief executive of a north India focused MFI said.

Credit bureau CRIF High Mark recently flagged that about Rs 24,500 crore — which is 9.3% of total microfinance portfolio of Rs 2.64 lakh crore — remained unpaid even after 180 days of due date, driving credit cost high for all microfinance lenders including NBFC-MFIs impacting their profit numbers.

“There may be temporary upward movement but gradually it will come down. Interest rates will reduce with good credit behavior and repayment track record,” said Satya MicroCapital managing director Vivek Tiwari.

Earlier, in a regulated rate regime when interest rates charged by MFIs to borrowers were fixed based on a maximum 10% margin over costs of funds, the average rate of interest had come down to 20.83% during the third quarter of FY22 from 23.66% during second quarter of FY21, according to sources. Based on the new uniform regulations which came into force from April 1, all the lenders engaged in microfinance have to put in place a board approved well-documented interest rate model/ approach for arriving at the all-inclusive interest rates.



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