Micro financial institutions (MFIs) have no respite from higher borrowing costs, even as public

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and private sector banks are cutting rates for the retail segment after the steps taken by the Reserve Bank of India.

Some industry experts view that even if banks cut rates for the sector, it would be difficult to pass the benefit to the end customer.

The micro-finance sector, which accounts for close to Rs 1,00,000 crore loan disbursements, has not seen any rate cuts from banks. Besides, some banks have also raised the security margins for MFIs from 10 to 25 per cent, thereby, making access to funds difficult.

P N Vasudevan, managing director of Equitas Microfinance, said with both inflation and interest rates cooling off, there is a strong case for the banks cutting rates on loans to micro finance institutions.

“MFIs borrowing costs from banks has increased to 13.5-14 per cent from 12 per cent earlier. Earlier, we were facing difficulty in securing funds due to tight liquidity conditions and, therefore, had to cut back on our disbursement targets. While the recent RBI measures have enhanced liquidity and access to funds has become easier, rates are still on the higher side. The rates may come down in the fourth quarter, when banks would need to meet their priority sector disbursement targets,” Arjun Muralidharan, CEO of Grama Vidiyal Microfinance, said.

Anal Jain, managing director, MVA Ventures, which has a $50 million fund to invest in Indian MFIs, said: “MFIs are facing such a volatile interest rate conditions for the first time. Earlier, the micro finance institutions, instead of increasing rates charged from the

customers, raised the processing fees to 2 per cent from 1 per cent. So, even if the banks cut rates at which they lend to MFIs, it would be difficult for the latter to pass on the benefit to their customers.”

Mona Kchawa, director investments at Caspian Advisors, said that the first priority for MFIs, if the

borrowing rate comes down, would be to meet their disbursement targets and achieve profitability.