'RBI norms on loans not to hit MFIs' profitability'

The Reserve Bank’s guidelines related to classification of bank loans to NBFC-MFIs under priority sector are unlikely to have a major impact on micro-finance institutions’ profitability, rating agency Icra said on Tuesday.

Last week, the central bank had said banks have to ensure MFIs comply with prescribed cap on individual loans and margin in order to be eligible to classify these loans under priority sector.
The interest rate cap will be the average of the base rates of the five largest commercial banks by assets multiplied by 2.75, or cost of funds plus margin cap, whichever is lower. The average of the base rates will be advised by the RBI later.

The interest margin for large MFIs (over Rs 1 billion portfolio outstanding) has been capped at 10 per cent as against 12 per cent for 2013-14.

“With most NBFCs-MFIs lending at an interest spread of 10 per cent or lower, the proposed reduction in interest spread is unlikely to have a significant impact on their profitability,” Icra said in a report here.