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Micro lenders: Micro loan delivery slowed in April-May as lenders took time to adjust to new guidelines

The revised microfinance guidelines, which put all micro lenders on the same platform, slowed loan disbursement in the first two months of its implementation as loan rejection rate jumped to about 50% from the normal 35% because lenders now have to follow processes more diligently.

Lending rates also jumped by 100-200 bps on an average as RBI removed the lending rate for NBFC-MFIs.

The uniform microfinance guidelines came into effect from April 1.

“Post the implementation of revised guidelines, microfinance loan rejection rate increased to over 50% vs 30-35% pre-March,” said in a note.

Loan disbursements across segments had been robust during the second half of FY22 backed by gradual rise in economic activities and steady improvement in repayment collections from ground.

However, the trend derailed in April and May due to two major reasons, according to the report. First, customer onboarding process realignment as per revised guidelines resulted in lower productivity during transition phase, second, higher rejection rate at over 50% vs 30-35% earlier.

This is likely to keep disbursement growth muted in the first quarter of FY23, ICICI Securities said.

RBI has mandated that a comprehensive credit bureau report needs to be considered before sanctioning of loans – ie lenders need to take into consideration all retail loan obligations of households and not only micro loan obligation – while arriving at aggregate exposure limit.

The microfinance loan ticket-size is also capped at an ‘EMI to income’ ratio of 50% for households with annual household income of less than Rs 3 lakh.

Most NBFC-MFI lenders have also raised their lending rates by 100-200 basis points to factor-in the higher credit cost they experienced in the previous two fiscals. Lenders have witnessed cumulative credit costs of over 10% during FY21-FY22, the note said. Removal of margin cap of 10% has enabled NBFC-MFIs to implement risk-based pricing against the previous formula-based pricing.

“The new regulatory regime will create a level playing field for all incumbents and the risk-based pricing approach is likely to enable the players to absorb cyclical lumpy credit costs more effectively than before,” ICICI Securities said.

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