“The yields on an overall basis will increase by 1-2% for larger microfinance institutions and to 3-5% on smaller MFIs,” said Jindal Haria, director, India Ratings and Research.
Yields on advances by microfinance institutions (MFI) will likely increase in the near term, after the Reserve Bank of India (RBI) announced withdrawal of the pricing caps on microfinance loans.
“The yields on an overall basis will increase by 1-2% for larger microfinance institutions and to 3-5% on smaller MFIs,” said Jindal Haria, director, India Ratings and Research.
The pricing caps on MFI loans were making it difficult for MFI lenders to book profits, as borrowing cost for these entities was high. Profits were also impacted due to the pandemic in the last two years. The revised regulations aim to provide a level playing field to all the players involved in microfinancing, analysts said.
“ICRA expects the market forces to result in lowering of interest rates in the long-term. However, in the near term, NBFC-MFI are expected to increase interest rates to compensate for the subdued profitability in the last two years,” said Sachin Sachdeva, vice-president and sector head, ICRA. However, the increase in maximum permissible indebtedness of borrowers poses a risk of over-leveraging in the industry, Sachdeva said.
According to the directions, all microfinance lenders must put in place a board-approved policy for pricing of loans. The policy must have a well-documented interest rate model and the different interest rate components, such as cost of funds, risk premium and margins.
The new regulations define microfinance loans as collateral-free loans given to a household or an individual family unit with household income of up to `3 lakh. The regulations are applicable to all lending entities. The removal of pricing caps provides more flexibility to NBFC-MFIs as they will be able to do risk-based pricing on their loans. NBFC-MFIs may now penetrate newer geographies, as pricing can now be differentiated, and cover higher operating costs for the same.
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The new norms would have a positive effect on NBFC-MFIs, especially mid- and small-sized ones, which were unable to originate substantially and their viability came under question once the lending rate came down to 21.5% on account of price caps. Only 30% of the microfinance industry is constituted by NBFC-MFIs.
The portfolio of NBFC-MFIs will now diversify and the shock-absorbing capacity will increase after the central bank reduced the minimum requirement of microfinance loans in the total assets to 75% from 85%. It is likely to be long-term positive as companies can offer secured loans of up to 25% of assets under management to minimise the overall credit risk. This could also provide adequate opportunities for NBFC-MFIs to invest in capabilities related to non-micro loan products.