MFIs reduce lending rates as RBI voices concerns

Kolkata: About half a dozen pure-play microfinance lenders have reduced lending rates in the past couple of months amid heightened regulatory scrutiny on the pricing policy adopted by these financiers that service the bottom of the consumer pyramid.

The Reserve Bank of India ( RBI) was conducting a scrutiny over the past six months or so, and that culminated into the decision to bar errant lenders from doing business from October 21 for charging "excessive" interest rate spreads over their cost of funds.

Both Arohan Financial Services and Asirvad Micro Finance -- the two NBFC-MFIs penalised -- have submitted fresh plans to the regulator. Arohan promised to reduce rates by about 200 basis points while Asirvad said it would lower rates by around 300 bps once they are allowed to resume business, people familiar with the matter said.

Among the bigger ones which have reduced lending rates since September are Annapurna Finance and Spandana Sphoorty Financial Services while Muthoot Microfin is likely to lower rates this month.

Several others are likely to review their pricing policy this month.

Top executives with Annapurna, Spandana and Muthoot Microfin said that they fix lending rates according to their respective board-approved pricing policy.

In a post-earnings analyst call last week, VP Nandakumar, managing director of Manappuram Finance, which owns 98% of Asirvad, said: "We (Asirvad) have decided to reduce the rate. As we are not lending, we can't say that we are lending at this rate. But we have given the assurance to RBI that our rate would be one of the lowest in the industry.

Industry sources said that Asirvad used to offer loans in a band of 24.24-24.35% a year. Arohan's average blended rate was 24.58% for the September quarter.

Muthoot Microfin chief executive Sadaf Sayeed said the company would reduce lending rates by a quarter of a percentage point this month to 23.05-23.6%, making it the third rate cut this year to pass on the benefit of lower cost of funds to borrowers. The company’s board at a meeting on November 5 decided to maintain the net interest margin at 12.75-13.00% and adjust the lending rates accordingly.

Spandana lowered rates from the beginning of September to the range of 19.75-24.75% from the earlier 24-25% with the eligibility of getting the lower rate depending on a combination of factors like borrowers' geographic and personal profile as well as how long the borrower has been with us, managing director Shalabh Saxena said. Its weighted average lending rate (WALR) for last quarter was 24.8%.

More than the lending rate range, the regulator looks at the WALR, which shows at which end of the rate band the lender is offering the loans the most.

Annapurna has lowered rates to 19.9-23.49% last month since November 5 while its WALR last quarter was 23.97%

Senior microfinance practitioners believe that RBI has no issue with the lending rates per se unless they are "usurious" but it raises alarm if there is lack of transparency in the pricing methodology.

RBI deregulated lending rates charged by NBFC-MFIs in 2022 while bringing out uniform regulation for all microfinance lenders including banks, small finance banks and NBFCs to create a level-playing field for all.

Following the RBI move, almost every NBFC-MFIs increased rates to cover their higher credit cost as a result of the pandemic-led stress in asset quality while some of them raised rates by as much as 450 basis points.

Over the last few months, RBI has been sensitising lenders on the need to use the regulatory freedom responsibly and ensure fair, reasonable and transparent pricing, especially for small value loans. "However, unfair and usurious practices continued to be seen during the course of onsite examinations as well as from the data collected and analysed offsite," it said last month.