BackSKS Microfinance cuts interest rates to 19.75%; shares surge 7%
The move makes SKS Microfinance the sole Indian microlender to offer loans at a rate below 20%
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Hyderabad: SKS Microfinance Ltd has cut interest rates by one percentage point to 19.75% on the loans it offers to low-income women borrowers, making it the sole Indian microlender to offer loans at a rate below 20%.
The move, which boosted SKS shares as much as 6.82% on Friday, came after Reserve Bank of India (RBI) decided to double the borrower limit for microfinance loans for less than 24 months.
Lower interest rates can attract more borrowers in an increasingly competitive market. Microfinance companies, which had started lending at around 28-34% in 2010, are now able to charge lower interest rates because of newer avenues to raise funds at lower cost and their ability to operate more efficiently than before.
“SKS is the first company to charge sub-20% interest rates on the core income generating loans," the company claimed in a statement on Friday. This is the fourth time SKS has reduced interest rates since October 2014.
Every quarter, the RBI asks microlenders that fall under its purview to charge rates 2.75 times higher than the base rates of top five banks or 26%, which ever is lower.
“When microfinance companies started operating in 2007, there was no regulation and interest rates charged were based on the investments made. Only in 2010 when the Reserve Bank entered as regulator, interest rates were capped. Now, with refinancing options, lower cost of funds and operational efficiencies all companies have started reducing interest rates. SKS has leveraged on completely optimizing the cost of operations, bringing it down and passing it on to customers," said Ratna Vishwanathan, chief executive of Microfinance Institutions Network (MFIN).
While SKS leads the pack in terms of offering the lowest interest rate, Svatantra Microfinance Pvt Ltd comes second with an interest rate at 22%, followed by Equitas Microfinance Pvt Ltd at 23%.
“The company could reduce its marginal cost of borrowing to 11.3% in Q2 FY16 from 13.6% in FY14 on account of downward adjustments in risk premium. Marginal cost of borrowing for H2 FY16 is expected to be lower than 11.3% given the company has accessed refinance from MUDRA at 10% and issued commercial papers at 9.5% per annum in October," SKS said.
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