The benefits of the revised microfinance lending framework will become apparent in the next six to 12 months, said Alok Misra, CEO and director of industry association MFIN. In an interview with Mithun Dasgupta, Misra says that under the new regulations, a range of interest rates is expected to emerge for different products and customer segments, and it would be wrong to apply simplistic price-quantity models to such a market. fragments:
The RBI released the revised microfinance lending framework on March 14 to end regulated interest rates and harmonize microloan standards for banks and non-bank lenders. What benefits do NBFC MFIs now derive from it?
The previous regulations were specifically for NBFC MFIs who were required to have 85% of their assets in the microfinance segment and various other microbusiness rules about loan amounts, prices, etc. So you had a situation where organizations were making loans to poorer, bottom-of-the-pyramid customers. more strictly regulated than players such as banks. These regulations were issued in 2011 and were appropriate at the time. Over the past decade, NBFC MFIs have expanded their portfolio and matured in terms of professionalism. They now serve 2.57 crore customers with a gross loan portfolio of Rs 87,444 crore and a market share of just over 30% as of December 2021. They are now ready to get more flexibility to design their own policies just like other players like banks. This is what the RBI has recognized – the March 2022 regulation is an acknowledgment of the growth and maturity of NBFC MFIs.
The regulations allow NBFC MFIs to have board-approved policies on, among other things, income assessment and transparent risk-based pricing. This allows these companies to be more strategic and innovative in their product offerings and to serve the sub-segments more efficiently and in a more targeted way. These benefits should be visible in the next 6-12 months.
Has the revised framework helped NBFC MFIs acquire more customers?
Due to the policy impact, it is still too early to give the growth in the number of customers. At present, all regulated entities are receiving 5.57 crore low-income borrowers small-scale credit services with a gross loan portfolio of Rs 2.56 trillion as of December 31, 2021. With these policy changes, the low-income borrower’s reach is expected to expand in three up to four years to 10 crore, formally financing a significant number of new credit customers.
Some microfinance entities have already increased their lending rates. Will it dampen credit growth initially?
The regulations allow lenders to maintain robust and transparent board-approved pricing policies that take into account 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 must understand that different products offered by microfinance institutions have different costs. These costs can relate to operations, geography, customer risk assessment or expected credit losses, which in turn can depend on several factors. Any changes in borrowing rates would depend primarily on changes in the cost of funds to the lender.
One must also realize that there is no ‘one’ interest rate that applies. We see a range of interest rates emerging for different products and customer segments. It would also be incorrect to apply simplistic price-quantity models to such a market. With around 5 crore borrowers, there is significant growth potential. Lenders are leveraging technology and various funding sources, among other things, to make loans available to more customers at the bottom of the pyramid.
What is the outlook for the sector in the current fiscal year?
The first three months of 2022 were healthier in every way: credit and disbursement growth, collections and a lower number of provisions. So I think the current budget is likely to see a rebound in growth.
Has collection efficiency returned to pre-pandemic levels?
Yes, the collection efficiency improves significantly. A large number of lending entities, including banks and NBFC MFIs, report more than 90% and some of them close to 100% collection efficiency in some regions. As the pick-up in economic activity improves, the propensity to repay on time increases. The new regulations will further stimulate growth thanks to innovative products targeting specific sub-segments.