According to the Crisil Rating report, the Reserve Bank of India's (RBI) new rules for microfinance institutions (MFIs) will help widen profits by giving such entities greater flexibility in operations.

According to the Crisil Rating report, removing the interest margin cap on loans is the biggest amendment in regulation that will help non-banking finance company-microfinance institutions (NBFC-MFIs) adopt a risk-based pricing approach and support profitability.

It will benefit mid-sized entities, which are under a lending rate cap linked to the base rate with relatively higher borrowing costs, and those with a rural focus, where competition is less and borrowers are less sensitive to interest rates.

It is an initiative to increase the permissible household income to Rs 3 lakh per annum, and the limit of non-microfinance loans to 25% of total assets would help grow the addressable market for such entities.

The last two years have been challenging for microfinance lenders due to the pandemic as they struggled with high credit costs.

Deputy Chief Ratings Officer, Krishnan Sitaraman, told the media that the amendment would help NBFC-MFIs to adopt risk-based pricing, improve profitability, expand the addressable market, and also address concerns about the over-indebtedness of borrowers.

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