Impact of removal of lending rate cap on NBFC MFI

By BWA Envoy
July 28, 2022
2 Minutes Read

The Reserve Bank of India has removed the caps on the pricing of small loans given by Non-Banking financial company-microfinance institutions (NBFC-MFIs), bringing them to the same level as banks. The margin cap was introduced a decade ago to stop NBFC-MFIs from charging high-interest rates but now they have freedom in fixing board-approved rates but will be under RBI scrutiny.

The prescribed ceiling rate earlier for NBFC-MFI had an unintended consequence of not allowing competition to play out and most lenders had the same level of pricing. Now since this has been done away with, the pricing will be risk based now and will take into account various factors like risk premium, cost of funds and others.

Impact on financial inclusion:

In addition, the regulator has also revised the definition of microfinance loans by increasing the loan cap. Collateral-free loan given to a household having an annual household income up to Rs 3 lakh will now be considered a microfinance loan. Currently, a microfinance borrower is identified by the annual household income not exceeding Rs 1.25 lakh for rural and Rs 2 lakh for urban and semi-urban areas. Also, the limit on loan repayment is 50% of monthly household income.

RBI has taken a prudent view of the bottlenecks that were presented in the credit delivery earlier and with the above revision of household income along with the removal of a cap on lending rates, low-income households will now come into the purview of accessible credit taking closer to the goal of financial inclusion.

Impact on portfolios of NBFC-MFI:

Enhanced flexibility in setting the interest rates will be one of the drivers in revival of profitability of NBFC-MFI this fiscal. The other factors that will support the improvement in profitability include a reduction in credit cost which will in turn help enlarge the market in terms of target borrowers and geographies. Though the current rising interest rate environment is not expected to impair the profitability of NBFC-MFIs as higher borrowing cost will be offset by steeper lending rates. The asset-quality stress which was there at the onset of pandemic has started to ease. As of March, 2022 30+ portfolio at risk (PAR) for NBFC-MFI stood at 10% when compared with 16% as of June, 2021.

The recent changes by RBI on NBFC-MFIs lending rates brings all commercial banks, excluding payments bank, under the same regulatory rules. It would bring uniformity in microfinance lending regulations and will, therefore, promote growth in the sector with more access to low - cost loan.