MICROCAPITAL BRIEF: Interest Rate Cuts by Reserve Bank of India Trickle Down to Microfinance Loans

Successive interest rate cuts by the Reserve Bank of India (RBI) since 2015 have led to decreasing cost of funds for microfinance institutions (MFI) and a reduction in lending rates to end customers. As inflation fell, RBI cut its policy rate in stages from 7.75 percent in January 2015 to 6.5 percent in April 2016. The average cost of funds for members of the Micro Finance Institutions Network (MFIN) decreased from 15.04 percent in December 2015 to 14.80 percent in March 2016.

Bandhan Bank, an Indian commercial bank based in Kolkata, announced it is bringing its microloan interest rates down to 19.9 percent from 20.5 percent. Bharat Financial Inclusion Limited, known previously as SKS Microfinance, is offering loans at a rate of 19.75 percent after a reduction of 100 basis points. Ujjivan, an MFI headquartered in the Indian state of Karnataka, reduced its prices by 160 basis points resulting in interest rates between 22 percent and 23 percent per year, “due to better credit ratings and increased capitalization levels”. An increase in the use of technology has also contributed to the reduction in rates by decreasing operating costs [1].

By Sharanya Madhavan, Research Associate

About Reserve Bank of India

The Reserve Bank of India (RBI) is India’s central banking authority. Established in 1935, it undertakes consolidated supervision of the financial sector comprising commercial banks, non-banking finance companies (NFBCs) and other financial institutions. Its tasks include supervising financial institutions, consolidating accounting standards, resolving cases of banking fraud, monitoring non-performing assets and supervising the rating model for the banking sector. As of August 19, 2016, RBI reported total reserves of INR 24.3 trillion (USD 366 billion).

Sources and Additional Resources

[1] Business Standard: Micro loan interest rates down on lower cost of funds

MicroCapital Universe: Reserve Bank of India

MicroCapital Universe: Bandhan Bank

MicroCapital Universe: Ujjivan Financial Services

MicroCapital Universe: Bharat Financial Inclusion

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