“Yields will generally increase by 1-2% for larger microfinance institutions and up to 3-5% for smaller MFIs,” said Jindal Haria, director of India Ratings and Research.

Yields on advances from microfinance institutions (MFIs) are likely to rise in the near term, after the Reserve Bank of India (RBI) announced it would lift price caps on microfinance loans.

“Yields will generally increase by 1-2% for larger microfinance institutions and up to 3-5% for smaller MFIs,” said Jindal Haria, director of India Ratings and Research.

The price caps for MFI loans made it difficult for MFI lenders to make a profit, as the financing costs for these entities were high. Profits have also been hit by the pandemic in the past two years. The revised regulations aim to provide a level playing field for all players involved in microfinance, analysts said.

“ICRA expects that market forces will lead to a cut in interest rates in the long term. However, in the near term, the NBFC-MFI is expected to raise interest rates to offset the lackluster profitability of the past two years,” said Sachin Sachdeva, vice president and sector head of ICRA. However, the increase in the debt limit of borrowers poses a risk of excessive leverage in the sector, Sachdeva said.

According to the directions, all microfinance lenders must have council-approved policies for pricing loans. The policy must have a well-documented interest rate model and the various interest components, such as costs of funds, risk premium and margins.

The new regulations define microfinance loans as unsecured loans granted to a household or individual family unit with a household income of up to `3 lakh. The regulations apply to all lenders. The removal of price caps provides more flexibility to NBFC MFIs as they will be able to use risk-based prices for their loans. NBFC MFIs can now penetrate newer geographies, as prices can now be differentiated and cover higher operating costs.

The new standards would have a positive effect on NBFC MFIs, especially medium and small MFIs, which failed to materialize and their viability was compromised as the borrowing rate fell to 21.5% due to price caps. Only 30% of the microfinance sector is made up of NBFC MFIs.

The portfolio of NBFC MFIs will now diversify and shock absorbing capacity will increase after the central bank lowers the minimum requirement for microfinance loans in total assets from 85% to 75%. It’s likely to be positive in the long run, as companies can offer secured loans up to 25% of assets under management to minimize overall credit risk. This could also provide sufficient opportunities for NBFC MFIs to invest in capacities related to non-microloan products.


This post Returns on advances by microfinance institutions are rising after new standards was original published at “https://www.financialexpress.com/market/yields-on-advances-by-microfinance-institutions-to-rise-after-new-norms/2464566/”

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