Non-bank players operating in the microfinance space may be subject to greater reporting rigour, with the Reserve Bank of India likely to ask them to submit granular monthly data on their weighted average lending rate and the spread they charge on the cost of funds, among others.
The central bank is considering the aforementioned reporting measure, based on which it can take suitable steps, if needed, to ensure that lenders don’t fleece hapless borrowers, predominantly women, from low-income households.
While non-bank entities have been given freedom for pricing small value loans in 2022, the central bank has come across several instances of the margin (spread) on their cost of funds exceeding the earlier cap of 12 per cent. This is based on the regulator’s inspection of their books in FY23 and FY24.
Cracking the whip
The outcome of this inspection is that the RBI recently cracked the whip on four non-bank players – Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance Pvt Ltd and Navi Finserv Ltd, asking them to cease and desist from sanction and disbursal of loans.
The entities that may be required to submit the aforementioned data to RBI will be non-banking finance company-microfinance institutions (NBFC-MFIs) and NBFCs having MFI as one of their lines of business.
The RBI expected the regulatory freedom given to non-bank players in March 2022 for pricing MFI loans (mostly given without collateral) to work in favour of small borrowers as competition among lenders usually makes loans cheaper, said a senior official with an industry body. However, this did not happen.
Creaming off fat profits
“The action against four non-bank entities, who were extreme outliers (when it comes to the spread they charged on the cost of funds and the number of loans given to an individual borrower), seems to be RBI’s way of conveying to all other non-bank players in the MFI ecosystem to eschew creaming off fat profits at the cost of small borrowers,” the official quoted above said.
Given that the internal rate of return expected by some of the foreign investors in these entities is north of 30 per cent per annum, their managements crank up pressure on field forces to get more business, the official said, adding a small borrower can encounter financial distress if he/she has 3-4 loans running simultaneously.
In the regard, RBI Governor Shaktikanta Das, earlier this month, cautioned NBFCs that an imprudent ‘growth at any cost’ approach would be counterproductive for their own health.
MFIN data
As per data compiled by Microfinance Industry Network (MFIN), among its 73 members, CreditAccess Grameen and SV Creditline had the lowest and highest average interest rate of 21.38 per cent (for Q4FY24) and 28.87 per cent (for Q1FY25), respectively.
There are 100 pure play NBFC-MFIs, out of which 15 are large. Then there are about 200 NBFCs having MFI as one of their lines of business. There are several players with spread on the cost of funds above the earlier cap of 12 per cent, per industry sources.
The MFI industry had a portfolio of ₹4,20,256 crore as at June-end 2024, with NBFC-MFIs accounting for 40 per cent, followed by banks (33 per cent), small finance banks (17 per cent) and NBFCs (10 per cent), per MFIN. The average loan size stood at ₹48,322.
