Microfinance regulatory bodies lay out guidelines to lower interest rates

A prime issue among borrowers of MFIs is the end use of the loan. At times, borrowers use the funds for purposes different from the original ones.

The self-regulatory organisations (SROs) for microfinance institutions (MFIs) have released guidelines for lowering the rates by 100-150 basis points as some lenders have been charging hefty interest in several states.

MicroFinance Institutions Network (MFin) and Sa-Dhan are the SROs for the microfinance sector. In addition to the cut in rates, MFin on August 1 in a press release said that it has introduced proactive steps, incuding adoption of guardrails. “Ten MFIN members have revised their interest rates downward in the last few months. The reduction in interest rates has been up to 150 basis points,” MFin said. They added that the cut in rates comes at a time when the cost of funds remains elevated for the MFIs.

MFin also said that MFIs must do an assessment of a borrower's household income and repayment obligations before approving a new loan. As explained in other words by a person who worked to develop this, MFIs will have to assess the financials of the all salaried persons in a family. MFin also said that no more than four lenders can lend to a borrower. Earlier, there were no limits on this. It also set the cap on total borrowing capacity to Rs 2 lakh. There was no such restriction earlier.

The other SRO, Sa-Dhan, in an all-member meeting in Bengaluru on July 23, released a list of new measures. It said that the member MFIs must follow transparent practices when pricing loans and components of the rate of interest like cost of funds, opex cost, risk margin, and so on. It also said that the rate of interest should be approved by members of the board and the processing fee should be fixed at 1.5 percent.

A prime issue in the sector is the end-use of the loan. At times, borrowers use the funds for purposes different from what they commit while taking a loan. Sa-Dhan said that the MFIs must verify the end-use of loans to ensure proper utilisation of funds.

Speaking to Moneycontrol, Jiji Mammen, executive director and chief executive of the SRO, said that Sa-Dhan is in touch with its members to ensure that they work out their pricing based on a proper policy approved by their boards. “One of the key focus areas of our discussion with the members was to clearly define components of costs while finalising their pricing,” he said.

The reason behind these guidelines, as confirmed by some people who are working closely on this, is high rates and aggressive lending in some north and north eastern states. “There are some small MFI players who have been charging very high interest rates - more than what is generally charged - which has caused some tension. These are small players mainly in the northern states,” a person aware of the developments said.

How have MFIs fared?

According to MFin’s latest Micrometer report, loan disbursals by MFIs increased 19 percent to Rs 77,877 crore during the December quarter 2022-23. The total microfinance loan portfolio increased to Rs 3.21 lakh crore as on December 31, 2022, the report said.

"Microfinance loan disbursals during Q3 of FY 22-23 improved to Rs 77,877 crore as compared to the same quarter of last financial year (Rs 65,392 crore). Some 189 lakh loans were disbursed during the quarter as against 165 lakh in Q3 of FY 21-22, indicating higher ticket size of new loans," it said.

It said that as on December 31, 2022, the microfinance industry served 6.4 crore unique borrowers, through 12.6 crore loan accounts.