RBI unhappy with rate transmission in MFI loans

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Microfinance borrowers are still paying high interest rates, which has caught the attention of the Reserve Bank of India (RBI). The RBI is unhappy with the pricing offered by microfinance institutions (MFIs), including banks and non-banks, which lend to low-income borrowers.

The RBI intended to reduce borrowing rates for MFI customers when it lifted the 10% cap on pricing in March 2022, but lending rates have actually increased to a five-year high of 24.7% since May 2022. This is a 200 basis point increase year-on-year.

MFIs say that the increase in lending rates is due to a combination of factors, including rising repo rates and the need to protect yields and shore up buffers for contingencies. However, the RBI believes that MFIs should adopt a graded pricing mechanism, under which different categories of borrowers are offered different interest rates.

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Under a graded pricing mechanism, new credit customers (NTCs) would be offered loans at the highest rate, while those who are new to the lender would be offered a slightly lower rate. Seasoned customers of the lender would be offered even lower rates.

The RBI believes that if more lenders adopt a graded pricing strategy, borrowing rates for MFI customers could ease by 200-300 basis points, provided that the cost of funds does not escalate further.

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