14% spread on loans prompted RBI action

The four non-banking finance companies (NBFCs), including two microfinance institutions (MFIs), that faced regulatory wrath last week were mainly charging exorbitant rates to micro-loan borrowers from the most vulnerable sections, in order to maintain spreads of 14 per cent, sources familiar with the development said.

- MANOJIT SAHA

On October 17, the Reserve Bank of India barred four NBFCs - Asirvad Micro Finance, Arohan Financial Services, DMI Finance, and Navi Finserv - from sanctioning and disbursing loans, citing usurious interest rates charged by them for their microfinance borrowers.

In March 2022, the RBI removed the pricing cap for microfinance loans, which was 12 percentage points over the entity's cost of funds. According to sources, an onsite regulatory inspection for FY23 and FY24 showed that most micro-finance players were maintaining a spread - the difference between cost of funds and lending rates - of over 12 per cent, with a few around 13 per cent.

The entities that faced action were found to have a spread of 14 per cent.

"The regulator gave the MFI industry flexibility as the pricing cap was removed. It was expected that they would be fair, transparent, and non-discriminatory while dealing with borrowers. Clearly, that has not happened," a source said.