RBI Governor urges NBFC-MFIs to exercise prudence in interest rate flexibility

Reserve Bank of India (RBI) Governor Shaktikanta Das emphasised the need for Non-Banking Finance Company-Microfinance Institutions (NBFC-MFIs) to exercise caution in utilising the flexibility granted in setting interest rates. Speaking at the annual Fibac event, Das noted that some NBFC-MFIs are enjoying wider net interest margins and called for judicious use of the interest rate-setting flexibility, especially in the microfinance sector that serves marginalised clientele.

While acknowledging the importance of the microlending segment as a crucial financial conduit for fostering financial inclusion, Das highlighted the responsibility of microfinance lenders to consider the affordability and repayment capacity of borrowers when determining interest rates. The microlending sector has undergone regulatory changes, including the deregulation of interest rates in 2021, allowing entities more flexibility in setting rates.

"Though the interest rates are deregulated, certain NBFC-MFIs appear to be enjoying relatively higher net interest margins. It is indeed for microfinance lenders themselves to ensure that the flexibility provided to them in setting interest rates is used judiciously," said Das.

The microfinance sector faced a crisis in Andhra Pradesh, leading to the creation of the NBFC-MFI segment. In response, the RBI imposed a cap on the maximum interest rates at 24 per cent, a regulation that was lifted in 2021. The recent comments from the RBI Governor highlight the ongoing concerns about responsible lending practices in the microfinance industry.