Relaxes lending rate cap, but retains margin cap

Microfinance institutions which are functioning as non-banking finance companies may have some reasons for cheer.

The Reserve Bank of India has announced a string of regulatory relaxations, including those related to pricing of loans.

MFI-NBFCs have been allowed operational flexibility whereby the interest rate that they can charge on individual loans can exceed the earlier cap of 26 per cent.

However, the flexibility on pricing loans comes with a caveat that the maximum variance permitted for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent.

MFIs have to ensure that the average interest rate on loans during a financial year does not exceed the average borrowing cost during that period plus the margin within the prescribed cap.

Even as the cap on interest rate has been removed, the RBI has persisted with the cap on margins — 10 per cent for large MFIs (with loan portfolio exceeding Rs 100 crore) and 12 per cent for others.

According to Alok Prasad, Chief Executive Officer, MicroFinance Institutions Network, so far MFIs were faced with a situation whereby raw material (loans from banks) pricing was market related but they had to contend with a cap on the pricing of their end product (loans to small borrowers). The new RBI norms address this issue to an extent.

Industry observers say that following the loan pricing flexibility given by the RBI, MFIs’ customers would not be subject to too much volatility in loan pricing.

Provisioning relaxation

In a breather to MFIs in Andhra Pradesh, the RBI has allowed the provisioning they made towards bad loans (originated in the State) to be notionally reckoned as part of their net owned funds (equity capital plus reserves) for calculation of capital-to-risk-weighted assets ratio.

However, there will be progressive reduction in such recognition of the provisions for the AP portfolio equally over a five-year period.

(This article was published on August 3, 2012)
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