There hasn’t been any cooling off in lending rates to microfinance borrowers and this has caught the attention of the Reserve Bank of India. Highly placed sources say that the regulator is unhappy with the pricing offered by MFI lenders, including banks and non-banks, catering to borrowers in the microfinance space. 

“What’s prevailing now goes against the intent of the March 2022 guidelines, which overhauled several practices of the MFI business, including lifting the 10 per cent cap in pricing. This was aimed at reducing borrowing rates for MFI customers, but the situation on the ground is very different,” said a highly placed source aware of the matter.

Also read: NBFC-MFIs set to overtake banks’ market share in microfinance segment

Market sources say that lending rates to MFI borrowers may have increased to a five-year high of 24.7 per cent since May 2022. This is an around 200 basis points increase in the pricing level on a year-on-year basis. “While a part of this increase is on account of repo rate hikes, because most NBFCs borrow from banks in a bid to protect yields and shore up the buffer for contingencies, lenders have jacked up their rates in the past year,” said the CEO of an NBFC-MFI.

Cascading effect

With non-banks lending to the segment not lowering their rates, banks, too, haven’t been proactive in bringing down the interest rate to this segment of borrowers. While they have also seen an increase in cost of funds, though not as significant as non-banks, they are faced with the challenge of competitive pricing.

“When one of the major non-banks lends at a certain rate, and banks cannot lend at a rate which is different from what non-banks offer. If we do so, that would have another kind of implication, which would be more difficult to handle. Also, once lending rates fall, this is a segment that we cannot reprice upwards so easily; it sets a new benchmark,” said the CEO of a bank operating in the MFI segment.

Graded pricing

These justifications barely cut the ice with the regulator. Consequently, the RBI insists that lending to the MFI segment, whether banks or non-banks, should adopt a graded pricing mechanism. What this implies is that different categories of borrowers should be offered different pricing.

Those who are new to credit (NTC) could probably be offered loans at the highest rate, while those new to the lender can be offered a rate which is a shade below NTC. Likewise, seasoned customers of the lender should also be offered different pricing. “A customer who is at the fifth or the sixth cycle with the lender should not be charged the same as what a customer in the first or the second cycle would pay,” said the CEO of an NBFC-MFI.

It is perceived that as more lenders adopt this pricing strategy, borrowing rates could ease by 200 – 300 bps, provided cost of funds does not escalate from hereon.

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Case for differentiated pricing?

-RBI unhappy with pricing offered by MFI lender in the MFI industry

-Lending rates may have increased to 5-year high of 24.7 per cent since May 2022

-This is ~200 bps increase in pricing on a year-on-year basis

-RBI insists that lenders should adopt a graded pricing mechanism

-Different categories of borrowers should be offered different pricing

-Accordingly, new-to-credit and new-to-lender customers should not be charged the same rate