Chapter 3A - Section 3a.9Pricing of Credit

Following the issuance of the new regulation in March 2022, concerns over high interest rates charged by NBFC-MFIs have been highlighted in various forums by the RBI and other stakeholders. However, it can be observed that the interest rate is a function of the cost of funds, expected credit loss and the net margin. The higher cost of borrowing and increasing ECL make the interest rates higher. More so due to higher borrowing costs.

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Performance of NBFC-MFIs in Microfinance

3.A.9 Pricing of Credit

Following the issuance of the new regulation in March 2022, concerns over high interest rates charged by NBFC-MFIs have been highlighted in various forums by the RBI and other stakeholders. However, it can be observed that the interest rate is a function of the cost of funds, expected credit loss and the net margin. The higher cost of borrowing and increasing ECL make the interest rates higher. More so due to higher borrowing costs.

Figure 3 A.9: Weighted Average Cost of Fund, Operating Cost and Interest Rate

There are six NBFC-MFIs that charge a weighted average interest rate of less than 20% to their microfinance borrowers.

Table 3.A.9: Number of NBFC-MFIs under various ranges of weighted average interest rate charged to Microfinance Borrowers
Interest rate range Number of NBFC-MFIs
Less than or equal to 20% 6
20%–22% 4
22%–24% 16
24%–26% 22
Above 26%* 27

* The highest interest rate is 33.5%

Conclusion

NBFC-MFIs have emerged as a critical pillar in expanding financial inclusion, particularly for rural and women borrowers. Their outreach has expanded with increased geographical coverage, expanded branch networks, and significant client growth. However, FY2024- 25 highlighted stress in portfolio quality, with rising PAR levels and substantial write-offs, reflecting heightened credit risk. Despite strong disbursement volumes and increasing asset size, sustainability remains challenged by high operating costs, staff attrition, and pricing pressures. In the future, balancing growth with prudent risk management and ensuring affordable credit will be vital for strengthening resilience and maintaining their role in inclusive financial development.

Box: 3A.1 SANKALP 2.0: Guidelines for Micro Lending Institutions (MLIs)

The Microfinance went through some stressful times in the last few months. Sensing the stress in the microfinance sector, Sa-Dhan convened a meeting of CEOs of MFIs and other institutions on 23rd July 2024 at Bengaluru, wherein it was decided to put some additional guardrails, SANKALP 1.0, to control the over-exposure of loans.

The SANKALP 1.0 was reviewed in the meeting of CEOs on 24 April 2025, in New Delhi, and felt that although the microfinance sector could reduce the over exposure significantly, to consolidate the position there was a need for few more measures of caution. Accordingly, a few additional guardrails were added and issued as SANKALP 2.0.

Three key issues to be addressed through guardrails are:

  • Pricing: Transparent and fair pricing of loans.
  • Over-indebtedness: Control Over-lending and over exposure.
  • Discipline: Adherence to the Code of Conduct and Responsible lending practices.

The new set of guardrails in the form of SANKALPS, (combining both the Sankalps) is as under:

Over Indebtedness

Guideline 1: The number of lenders for microfinance loans shall not exceed 3 (THREE), from all types of lenders.

Guideline 2: While considering a fresh loan, the combined exposure of a household in microfinance and unsecured retail loans shall not exceed ₹2,00,000, subject to RBI- prescribed repayment obligation cap of 50% of the household’s monthly income.

Guideline 3: No fresh loan to the same borrower, whose existing loan is still continuing as outstanding, before 12 months of disbursement or has not completed 50% repayment

Guideline 4: Every microfinance loan should mandatorily do a comprehensive credit bureau check at the household level.

Pricing of Loans

Guideline 5: Lending Institutions should follow transparent practices in deciding the pricing of loans. Components of the rate of interest (Cost of Funds, Opex Cost, Risk Margin and Margin) should be well defined and in compliance with guidelines issued from time to time. The Rate of Interest should be justifiable and approved by the Board of lending institutions.

Guideline 6: Processing fee to be capped at 1.5% (excluding applicable taxes)

Code of Conduct and Discipline

Guideline 7: No loan to be given to clients who is in default of any loan amount, and such due shall not exceed ₹3,000 and remain unpaid for more than 60 days (60+ dpd). Efforts should be made to bring down the norm of the delinquency level to 30+ dpd, to improve the hygiene of loan assets.

Guideline 8: The MFIs should move towards making PAN Card as the first ID for KYC and Credit bureau reporting. An aspirational level of 30% coverage through PAN may be attempted in a year time.

Guideline 9: The end use of loans to be verified to ensure proper utilization of loans.

Guideline 10: Do a mandatory employee bureau check before hiring. Any staff hired from the microfinance industry should only be given three months’ time to produce a relieving letter. The lending institutions should also not withhold the relieving letter of any staff member without a justifiable reason.

The guardrails under SANKALP 2.0 was made applicable from 1st June 2025.