Our survey also revealed that most MFIs have increased the yield at a uniform rate irrespective of risks across customers and geographies. A limited number of MFIs raised the yield by following a risk-based pricing approach based on
- Underlying risk of borrowers (linked to their CIBIL scores)
- High-risk geographies
- Non-home state geographies
In our view, the new guidelines provide headroom for absorbing higher credit costs as pricing is driven by market forces or the cost of borrowing. We expect rates will continue to be at elevated levels in the near term till the industry recovers the losses on account of Covid, after which competitive pressures and a different policy rate trajectory may influence pricing.
De-regulation of interest rates provides a good opportunity for the industry to have differentiated pricing based on the riskiness of borrowers even within the same group. This will eventually pave the way to an improvement of the credit habit of borrowers as it will reward them with lower interest rates and vice-versa. Going forward, MFIs could eventually charge interest rates based on the underlying risk of each borrower.
(ii) Processing fees
Processing fees are another part of the pricing of MFI loans which was limited to 1% of the gross loan amount previously. However, the restriction has been lifted in the new RBI regulations. Our survey revealed that most MFIs have increased the processing fees by 100 bps to 2% after the new rules were implemented.
We have already mentioned the increase in operating expenses due to higher TAT for onboarding customers, frequent training, and CIBIL being run for 3-4 members per case instead of 1 (under the previous regulation) for NBFC-MFIs due to new regulations. Hence, lifting the restrictions on processing fees seem plausible as the increase in fee is expected to cover the immediate increase in operating expenses of NBFC-MFIs.
Here are a few takes of the market practitioners regarding the new regulations:
Kartik Mehta, MD of Ahmedabad-based Pahal Financial Services, said “The entire eco-system will need to reinvent themselves to be able to follow the new regulations. Entities will need to have a certain minimum level of technological evolution to be able to sustain in this segment. Also, the front-end acquisition teams of all the REs will need to be retrained to be able to capture the essence of the new regulations.”
When asked about the de-regulation of interest rates, Mehta said, “By introducing risk-based pricing, the regulator has created a window for good customers to get a competitive pricing thereby navigating the REs towards a more market-led efficient delivery model.”
As per Vivek Tiwari, MD, CIO & CEO of New Delhi-based SATYA MicroCapital, “The new regulations are instrumental in making more credit available to the mass population with increased income limit. In a way, they will help increase the market potential of microlending by at least double in the near term. They will also bring more product innovations, a larger reach, and competitiveness in customer service and pricing. With relaxed pricing norms, institutions will be able to serve under-penetrated markets even with higher operating costs.”
With respect to the impact of new regulations on the rejection rate, Tiwari commented, “We have seen an increase in rejections in existing areas of operations across 100 districts. Now, we will be looking for an opportunity with a deeper penetration in new territories with lesser credit offtake at present. Product innovations coupled with new reach will reduce rejections going forward which will, in turn, include more people in the microlending net in the next 2-5 years.”
NBFC-MFIs are not only an economic tool to further financial inclusion in India but also a medium to impact livelihoods in rural and urban areas and to empower women who comprise the largest part of their borrower base. The new regulations are expected to fuel growth in the industry once the challenges with respect to their implementation are sorted out in the near term.
The views provided in this blog are the personal views of the author and do not necessarily reflect the views of Vivriti. This article is intended for general information only and does not constitute any legal or other advice or suggestion. This article does not constitute an offer or an invitation to make an offer for any investment.