Microfinance-focused lenders in India, including Ujjivan Small Finance Bank, Arohan Financial Services, and Asirvad Micro Finance, have lowered their lending rates in response to the Reserve Bank of India’s (RBI) call for a “fair, reasonable, and transparent” pricing policy for their small-value loan products. This move is a significant departure from the previous lending rates, which were raised by 300-450 basis points after the RBI de-regulated interest rates for Non-Banking Financial Companies-Micro Finance Institutions (NBFC-MFIs) in 2022.
Ujjivan Small Finance Bank reduced its lending rates by 75 basis points, with rates ranging from 21.75% to 23%. Arohan Financial Services, which was previously serving a lending ban, has introduced a self-imposed margin cap of 12% over the cost of funds and a maximum 25% growth guidance for any business year. Asirvad Micro Finance lowered its interest rate on income-generating loans to 21.47% from 23.96% earlier.
The RBI had banned Ujjivan, Arohan, and other NBFC-MFIs from lending for a period of time due to concerns over excessive interest spreads and gaps in household income assessments, leading to over-lending. However, the RBI removed the restrictions from these lenders in January 2023. Arohan’s managing director, Manoj Kumar Nambiar, stated that the company had engaged with the RBI to address concerns around pricing, loan renewal processes, and control change approvals.
This development is a significant step forward in promoting financial inclusion and ensuring that small-value loan products are accessible to vulnerable borrowers at reasonable interest rates. The RBI’s efforts to regulate the NBFC-MFIs and promote fair lending practices have been welcomed by the industry, and this move is seen as a positive step towards achieving financial stability and inclusive growth.