The benefits of the revised framework for microfinance loans will become visible over the next six-12 months, says Alok Misra, CEO & director of industry body MFIN. In an interview with Mithun Dasgupta, Misra says under the new set of regulations, a range of interest rates is expected to emerge for different products and customer segments, and it would be erroneous to apply simplistic price-quantity models to such a market. Excerpts:
The RBI on March 14 released the revised framework for microfinance loans to put an end to regulated interest rates and harmonise micro-lending norms across banks and non-bank lenders. Now, what kind of benefits are NBFC-MFIs getting from it?
The earlier regulations were specifically meant for NBFC-MFIs who were required to have 85% of their assets in the microfinance segment and several other microbusiness rules on loan amount, pricing etc. So, you had a situation where organizations lending to poorer, bottom-of-the-pyramid customers were more tightly regulated than players like banks. These regulations were released in 2011 and were appropriate for that point in time. Over the last decade, NBFC-MFIs have grown their portfolio manifold and have matured in terms of professionalism. They now service 2.57 crore customers with a gross loan portfolio of Rs 87,444 crore and a market share of just above 30% as of December 2021. They are now ready to be allowed more flexibility to design their own policies just like other players like banks. This is what the RBI has recognized – the regulations of March 2022 are a recognition of the growth and maturity of NBFC-MFIs.
The regulations allow the NBFC-MFIs to have board-approved policies for income assessment and transparent risk-based pricing, among others. This will allow these companies to be more strategic and innovative in their product offering and cater to the sub-segments in a more efficient and focused manner. These benefits would become visible over the next 6-12 months.
Has the revised framework helped NBFC-MFIs acquire more customers?
It is too early to give the growth in the customer number due to the policy impact. At present, across all the regulated entities, 5.57 crore low-income borrowers are being provided small scale credit services with a gross loan portfolio of Rs 2.56 trillion as of December 31, 2021. It is expected that with these policy changes, the low-income borrower outreach will expand to 10 crore in three-four years, bringing a significant number of new-to-credit customers to formal finance.
A few microfinance entities have already increased their lending rates. Will it initially dampen the loan growth?
The regulations allow lenders to have a robust and transparent board-approved pricing policy which will take into account the different costs and an acceptable profit margin. The emphasis is on risk-based pricing. The policies and their applications are subject to regulatory oversight and inspection. We need to understand that different products offered by microfinance institutions would have different costs associated with them. These costs could be pertaining to operations, geography, client risk assessment or expected credit losses, which could, in turn, depend on multiple factors. Any changes in lending rates would mainly depend on change in cost of funds for the lender.
One must also appreciate that there is no ‘one’ interest rate applicable. We see a range of interest rates emerging for different products and customer segments. Also, it would be erroneous to apply simplistic price-quantity models to such a market. With around 5 crore borrowers, there is substantial potential for growth. Among other things, lenders are leveraging technology and different sources of funding in order to make loans available to more customers at the bottom of the pyramid.
What is the outlook for the sector in the current financial year?
The first three months of 2022 have been healthier in every aspect – credit and disbursement growth, collections and lower quantum of provisioning. So, I feel the current fiscal will likely see a revival in growth.
Has collection efficiency returned to the pre-pandemic level?
Yes, the collection efficiency is significantly improving. A big number of lending entities, including banks and NBFC-MFIs, are reporting over 90% and some of them nearly 100% collection efficiency in some regions. As the pick-up in economic activity improves, the propensity to repay on time is rising. The new regulations will further spur the growth due to innovative products targeted at specific sub-segments.