Microlenders want the intervention of the Reserve Bank of India in widening the scope of calculation of the credit pricing of non-bank microfinance institutions (NBFC-MFIs) amid declining base rates.
The RBI on the last working day of every quarter announces the base rates for NBFC MFIs. The regulator takes the average base rates of the five largest commercial banks to arrive at the interest rates to be charged by the NBFC MFIs to their borrowers in the ensuing quarter.
This method has been in place since 2014. The regulator has also placed caps on the interest rates – minimum of either cost of funds plus margin (10 per cent for large MFIs and 12 per cent for small MFIs) or 2.75 times the average base rate as specified above. With the base rate for the April-June quarter of 2021-22 set at 7.81, the prescribed interest rate works out to 21.47 per cent for the quarter.
But according to microlenders, banks including the big five are not the only source of funds for these institutions. Strict credit rating requirements often make it difficult for smaller MFIs who in turn depend on NBFCs.
“The small and mid-sized MFIs which have a portfolio of less than Rs 200 crore do not always have easy access to the top five banks. They depend on other NBFCs where the rate of interest is much higher running to 15-16 per cent which inflates cost of funds,” said P. Satish, executive director, Sa-Dhan, a self regulatory organisation of MFIs.
Moreover, the applicable average base rates have been on a declining trend in line with the falling interest rates. While this is good news for borrowers, the microlenders point out that this puts a pinch on the margins.
“Further decline in rates will put severe pressure on the margins. There is a need to realign the credit pricing, identify which banks and NBFCs have higher exposure to MFIs and make the rate calculation more broad based,” said Kuldip Maity, MD and CEO of Village Financial Services.
The average base rate as declared by RBI has come down from 9.21 per cent for the first quarter of 2019-20 to 7.81 per cent in the first quarter of 2021-22.
MFI associations have suggested to the RBI to widen the basket of financial institutions beyond the top 5 banks and include NBFCs, medium sized commercial banks and small finance banks who are also source of funds for NBFC MFIs.
