Micro loans too are getting cheaper now

Micro loans for the poor are also getting a tad cheaper, thanks to interest rate cuts by leading microfinance institutions (MFIs). 

From March this year till date about half a dozen micro lenders have voluntarily reduced their lending rates by 50 to 155 basis points (bps).  Last month, these MFIs decided to cut their lending rates by a further 25 basis points by end-September this year.

The only listed MFI, SKS Microfinance, leads the bandwagon with the highest interest rate cut of 155 bps made early this month. Others, including Kolkata-based Arohan, Bangalore-based Ujjivan and Janalakshmi, and Chennai-based Equitas, have also announced varied rate-cuts. As a result, interest rates on micro loans now range between 22 per cent and 24 per cent.

According to Alok Prasad, industry expert and former chief executive of Microfinance Institutions Network (MFIN), more rate cuts are likely in the days to come. “While bigger players can manage it due to economies of scale, it will surely be a challenge for the smaller players,” he told BusinessLine  on Wednesday.

The nudge for the rate cuts has come from the government and the RBI, it is learnt. “There has been a feeling that the permitted interest rate margin of 10 percentage points (as recommended by the Malegam panel in 2011) is too wide and it should be brought down voluntarily,” said a top source. 

Banks, which provide a large chunk of the funds for many MFIs, have cut their rates by about 30 bps over the past four months. 

PN Vasudevan, MD of Equitas, said the cost of funds has come down to 12.5 per cent from 13.7 per cent.  

“Operational efficiencies allow good players to offer a further reduction,” he added. Sadaf Sayeed, Chief Operating Officer, Muthoot Microfinance (Pappachan group), said MFIs are conscious of the burden on the end-user. 

“Cutting rates is a function of the rates at which we source funds. We are also innovating and passing on the rate reductions whenever possible,” he said. He pointed out that while the margin of 10 percentage points may seem steep, the cost of running an MFI itself accounts for 6-7 per cent and there are provisions, losses and write-offs to handle.  

Limited impact The rate-cut may not immediately drive up demand for micro loans as the impact may be limited in the short term.

For example, a 1 per cent reduction in interest rate on a loan of ₹15,000 for two years will result in a reduction of ₹8 in the monthly EMI (equated monthly instalment) for the borrower. But the fact remains that a poor borrower will stand to gain in the long run. “It’s also a feel-good factor to cut interest rates voluntarily,” Vasudevan said.

The MFI industry is now in an upbeat mood and seems to have put behind painful memories of the crisis it witnessed three years ago arising out of complaints of high interest rates and regulatory interventions by the Andhra Pradesh Government.

Last financial year, it registered its highest ever growth of 61 per cent, taking the total outstanding loan portfolio to ₹40,138 crore.

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