In a step that can start a rate war among microfinance institutions (MFI), Bandhan Financial Services has reduced lending rates by about 5 percentage points to 19.1% from 24% on a reducing balance. With this, Bandhan’s personal loans are expected to become cheaper.
Bandhan’s step will directly help its 25 lakh+ poor women borrowers. The lender said that the new rate will come into play from 1st May.
Bandhan MD Chandra Shekhar Ghosh said, “We have proved that it’s doable (reducing interest rates). Others should reduce rates too.” In general, the rate of interest charged by the MFIs on its personal loans is about 24% per annum.
Small Industries Development Bank of India (Sidbi), which assists MFIs with capital assistance and loans, appreciated the step. KS Singhwan, Sidbi chief general manager said, “This is what we wanted them to do. We want all MFIs to follow Bandhan”. RBI also had repeatedly stressed on MFI to lower the rates.
Bandhan said from now on the borrowers will have to pay 44 installments instead of 45 per year. However the size of weekly installment remains constant.
Singhwan anticipates all other MFIs to follow suit. He said, “Ultimately, interest rates have to come down. We understand lenders are considering a rate reduction. It will happen sooner or later depending on their size of business and cost of funds.”