MFIs raise lending rates despite policy cut amid high credit costs

Microfinance institutions (MFIs) appear to have broken ranks with other financiers on interest rates, having raised their lending rates even after a percentage-point reduction in policy rates in India this year.

Publicly listed NBFC-MFIs such as CreditAccess Grameen and Muthoot Microfin have increased lending rates recently, three people aware of the development said. Fusion Finance revised its lending rates from June 19.

Both the central bank and the government have been voicing concerns over "excessive", unreasonable and "unsustainable" interest rates being charged to the bottom of the pyramid customers.

Sectoral leaders said that the high credit cost on account of severe asset quality stress and sticky borrowing costs at the higher level compelled them to revise rates upward.

Sa-Dhan, one of the self-regulators for the sector, said that the borrowing costs of their members have not gone down yet despite the policy rate cuts. Microfinance Institutions Network, the other self-regulator, did not comment.

CreditAccess Grameen's average interest rate for the June quarter was at 22.11% as compared with 21.5% in the preceding three-month period. Muthoot Microfin raised the range of interest rates to 24.20-24.85% from 23.05-23.60%, people in the know said

"Interest rates are a function of borrowing cost, credit cost and operational cost," said Jiji Mammen, executive director of Sa-Dhan

The central bank, which cut the repo rate thrice in as many meetings since February, expected the transmission of monetary policy to be faster this year. "Generally it takes a quarter to translate the reduction in interest rate by lenders to reflect on the borrowing cost of the MFIs. So we are expecting some reduction in borrowing cost will happen soon due to the reduction of the repo rate by the RBI," Mammen said.

Asirvad Micro Finance, which was barred from lending during the third quarter of FY25 for charging "excessive" interest rates, has revised lending rates upward to 22.75-24% effective July 1, according to the company website. It had a uniform rate of 21.47% at the beginning of the year.

Arohan Financial Services, which also served a ban along with Asirvad, has raised the lower band of its interest rate range to 22.24% from 21.99% while keeping the upper band the same at 22.99%. "Cost of funds is picked up from the pool of borrowings for any MFI. We hope to get the full benefit of the 100 bps repo rate cut being transmitted," said Arohan managing director Manoj Kumar Nambiar.