Microfinance interest rates continue to climb as credit costs stay high

Microfinance rates have firmed further, defying the broader trend of declining rates, as lenders face rising credit costs amid persistent asset quality stress, which is expected to linger for another quarter.

At least three large non-bank microfinance institutions (NBFC-MFIs) - Arohan Financial Services, Satin Creditcare Network, and Spandana Sphoorty Financial - have raised interest rates over the past two months. Several others had done it around June-July.

As a result, the interest rate range for large NBFC-MFIs has widened to 18-28%, up from 18-25% over the last two months, marking a rise of 300 basis points (bps) at the upper end, data from company websites showed.


The rise in rates is despite the Reserve Bank of India lowering policy rate by 100 bps since February this year after a two-year pause.

"Credit cost for MFIs rose sharply to 9% of average total assets in FY25 compared with 2.6% in FY24 and is likely to remain elevated in FY26," Care Ratings noted in its credit assessment report for the first half of the fiscal.

Microfinance institutions follow risk-based pricing, meaning lending rates vary depending on the borrower's risk profile.

Small finance banks (SFBs) have maintained lending rates between 20-29%, despite having access to lower-cost funds. Some large private banks also charge up to 25.5% on micro loans.

Spandana, which has faced significant asset quality challenges, raised its minimum lending rate by 325 bps to 23% from 19.75%, and its maximum rate by 125 bps to 26% from 24.75%.

Satin increased its upper band rate by about 300 bps to 27.95% from 24.98%, while its minimum rate rose slightly to 23.18% from 23.03%.

"The rates are based on risk-based pricing," said HP Singh, chairman of Satin. "The rate is higher for the new-to-credit customer who does not have a credit profile with a credit score and carries a high ratio of delinquency risk. The moment a customer gets into the second cycle then the rate charged drops by 350 basis points," he explained.

Arohan's risk-based rates now stand at 23.87-24.24%, up 125-163 bps from the previous range of 22.24-22.99%.

"Microfinance pricing is a function of cost of funds, operating expenses, liquidity risk premium, credit costs, and shareholder returns," Arohan managing director Manoj Kumar Nambiar said. "While the pool cost has come down by over 50 bps in the last one year, the incremental landed cost of funds has been almost flat for us in that same period."

According to him, higher delinquency in the field over the past 12 months has pushed up microfinance lenders' credit costs. "Lower debt funding has impacted the liquidity risk premium, and flat pricing, conservative credit underwriting - especially with the guardrails affecting new business writing - and growth have increased the operating expense ratio," Nambiar added.

IIFL Samasta, another major NBFC-MFI, charges between 22.95-25.95%, while CreditAccess Grameen, the largest player, offers rates ranging from 18-23% annually.

Among SFBs, Unity's micro loan rates range from 25-29%, while AU Small Finance Bank, the largest lender in this category, charges 25.5-26% annually.