Mumbai: Ujjivan Financial Services Ltd, which plans to start small finance bank operations by the first quarter of the next calendar year, on Wednesday said it would reduce borrowing costs by 0.75% with effect from 1 October. This is the second interest reduction by the company in past one year. Ujjivan’s interest rate stands at 22%.

“With marginal costs coming down and festive season coming up, we have decided to reduce the interest rates," said Sudha Suresh, chief executive officer of Ujjivan.

Marginal cost for Ujjivan has reduced by 100-150 basis points in the last few months, added Suresh. One basis point is one-hundredth of a percentage point.

Ujjivan’s gross loan portfolio stood at 5,851 crore as of 30 June, an increase of 67% over the same period a year ago. The company raised 885 crore through initial public offering (IPO) in April.

It is the only small finance bank licencee apart from Equitas which has raised money from the public. RBI gave in-principle licence to ten companies out of which only Capital Small Finance Bank and Equitas Small Finance Bank have kicked off operations.

Ujjivan Financial Services, Disha Microfin Pvt. Ltd, Janalakshmi Financial Services Ltd, AU Financiers (India) Ltd, ESAF Microfinance and Investments Pvt. Ltd, RGVN (North East) Microfinance Ltd, Suryoday Microfinance Pvt. Ltd and Utkarsh Micro Finance Pvt. Ltd are all in various stages of readiness for their small finance banks.

Microfinance companies borrow funds from banks and then give loans to small borrowers. The major cost for them is the borrowing cost from banks. With banks adopting marginal cost of lending rates (MCLR), the benefits are being passed on to these companies.

MCLR is new benchmark lending rate where fund costs are calculated through a weighted average.

Other microfinance companies too are preparing to reduce their interest rates. Bharat Financial Inclusion Ltd (formerly SKS Microfinance Ltd.) is the only microfinance company in the world with a sub-20% lending rate at 19.75%. The company reduced interest rates in December last year by one percentage point.

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