RBI repo rate hike's impact on microfinance sector remains uncertain

RBI's repo rate hike may tighten credit for microfinance institutions (MFIs) and affect margins, say experts. While some see minimal immediate impact, others warn of a potential liquidity crunch, with the full effect remaining uncertain.

The Reserve Bank of India's recent repo rate hike could tighten credit availability for microfinance institutions (MFIs) and put pressure on their margins, industry executives said, while noting that the extent to which lenders pass on higher borrowing costs to borrowers remains uncertain.

Expert Opinions Divided on Impact

Speaking to ANI on the sidelines of Sa-Dhan's 21st Annual National Conference on Inclusive Growth, Jiji Mammen, Chief Executive Officer of Sa-Dhan, said the 25-basis-point increase in the repo rate from 5.25 per cent to 5.50 per cent was unlikely to have a major immediate impact on the microfinance sector, as most institutions were adequately capitalised. “I don't think it is going to create much kind of a problem, especially in microfinance sector,” Mammen said, adding that any transmission of the rate hike to lending costs would take time. He said borrowing costs could rise slightly for businesses, including micro, small and medium enterprises, but the increase was unlikely to have a major impact on their performance.

However, Subrat Sabyasachi Roy, Head of Strategy at Annapurna Finance Pvt Ltd, said the rate hike could affect the availability of credit for MFIs as banks may tighten lending. “Anytime the repo rate increases, the impact will be that there will be a liquidity crunch,” Roy said, adding that interest rates charged by lenders to MFIs could also increase.

Roy said the ability of microfinance institutions to pass on higher borrowing costs to their borrowers remained uncertain, given the regulatory requirements governing their lending practices. “Maybe the net interest margin will be impacted,” he said, adding that the impact on individual institutions would become clearer over time.

Conference Highlights Broader Challenges and Tech's Role

The conference brought together policymakers, banks, investors, rating agencies, fintech companies and microfinance industry representatives to discuss the sector's challenges and future growth.

Mammen said the conference could help institutions identify ways to address recent challenges and prepare for future risks. He also described the GST Council's recent recommendations as a step in the right direction, particularly measures that had been pending since the introduction of the tax regime.

Roy highlighted the role of technology in improving the performance of microfinance institutions, saying digital tools could strengthen monitoring and control mechanisms while preserving the sector's human connection with customers.

The impact of the rate hike on microfinance lenders will depend on how borrowing costs and credit availability change in the coming period, Roy said, adding that it was too early to assess the full effect on individual institutions. (ANI)

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