Micro-lending slowed in April-May as lenders were slow to adjust to new guidelines

The revised microfinance guidelines, which put all microlenders on the same platform, slowed loan disbursement in the first two months of its implementation, with the loan rejection rate climbing to around 50% compared to the normal 35%, as lenders must now follow the processes more diligently.

Lending rates also jumped by 100 to 200 basis points on average as the RBI scrapped the lending rate from NBFC-MFIs.

The Uniform Microfinance Guidelines came into effect on April 1.

“After the implementation of the revised guidelines, the rejection rate for microfinance loans increased to over 50% from 30-35% before March,” said in a note.

Loan disbursements across all segments were robust in the second half of FY22, supported by a gradual increase in economic activity and steady improvement in repayment collections on the ground.

However, the trend went off the rails in April and May for two main reasons, according to the report. First, the realignment of the customer onboarding process according to the revised guidelines resulted in lower productivity during the transition phase, second, a higher rejection rate of more than 50% compared to 30-35% previously.

That should keep disbursement growth muted in the first quarter of FY23, ICICI Securities said.

RBI has required that a full credit bureau report be considered before loans are approved – meaning lenders must consider all household retail loan obligations and not just the micro-loan obligation – while reaching the aggregate exposure limit.

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

Most NBFC-MFI lenders have also raised their lending rates by 100 to 200 basis points to account for the higher cost of credit they have experienced over the previous two fiscal years. Lenders witnessed cumulative credit costs of more than 10% in fiscal years 21 and 22, the note said. The removal of the 10% margin cap allowed NBFC-MFIs to implement risk-based pricing as opposed to previous formula-based pricing.

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

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