MFIs’ cost of funds falls in FY18

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New Delhi | Updated: April 3, 2018 4:55:24 PM

Contrary to most financial firms, microfinance institutions (MFIs) have seen their borrowing costs drop in the last three quarters as the conversion of a number of top MFIs into small finance banks (SFBs) helped free up bank funding.

small finance banks , rbi, mfiNine of the 10 applicants who received the Reserve Bank of India’s (RBI) approval to set up SFBs were MFIs.

Contrary to most financial firms, microfinance institutions (MFIs) have seen their borrowing costs drop in the last three quarters as the conversion of a number of top MFIs into small finance banks (SFBs) helped free up bank funding.

The fall has been roughly to the extent of 50-100 basis points (bps) for most large MFI players between July and December 2017 – a period which coincided with a shooting up of yields in the bond market.

Nine of the 10 applicants who received the Reserve Bank of India’s (RBI) approval to set up SFBs were MFIs.

Bharat Financial Inclusion, the largest MFI in the country, saw its marginal cost of borrowings fall to 8.5% at the end of December 2017 from 8.9%. The other listed MFI, Satin Creditcare, saw a 50-bps drop in its cost of funds between Q1FY18 and Q3FY18 to 12%. Kolkata-based Arohan Financial Services saw a one percentage point-drop in its cost of funds between June and December 2017 and is now paying less than 10% on its borrowings.

HP Singh, chairman and managing director, Satin Creditcare, said the benefit of fall in costs has been passed on to MFI customers as well. “We’ve gained from the good monsoon, excess liquidity and priority-sector lending (targets) in the microfinance space,” he said. “Similarly, for us, the rate on the end product has gone down. We were charging close to 24% three quarters back; we have brought it down to 22%.”

Manoj Kumar Nambiar, managing director, Arohan Financial Services, told FE recently that being left with fewer options to meet their priority-sector lending (PSL) requirements, banks were offering cheaper loans to MFIs. ”It has affected our pricing as well. We are now at 20.99%” he added.

Supreeta Nijjar, sector head, financial sector ratings, Icra, agreed that lower competition for banks’ PSL outlay had helped MFIs. “For MFIs, the cost has come down because they continue to be entities which are eligible for PSL, which has supported their cost of funds over the last one year,” she said.

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