Hello everyone,
Welcome to the 218th edition of The Pattern, a weekly newsletter on the latest in finance, technology, and the economy.
Open a lending app this week and, chances are, you'll see the usual offers, festive or otherwise. Lower rates, easier EMIs, more reasons to borrow.
Look a little closer, though, and things aren't as straightforward as the ads make them sound. Loan rates have started edging up. Deposit rates are rising too. And in microfinance, banks are pulling back on direct lending, while still putting money into the NBFC-MFIs serving those borrowers.
The changes are small for now, but they're starting to show up in how lenders are making decisions.
The RBI's latest numbers show rates starting to move back up. MFIN's latest Micrometer, out this week, points to a similar change in microfinance. Banks are lending less directly to borrowers, but they're still putting money into the NBFC-MFIs that serve them.
Let's start with the rate story.
Rates are turning, and borrowers will feel it
For the first time since January 2025, the average rate on banks’ existing rupee loan book inched up instead of down. The weighted average lending rate on outstanding rupee loans rose to 8.97% in July from 8.96%, a one-basis-point increase.
On fresh loans, the story is more "pause than reversal". The weighted average lending rate on fresh rupee loans was 8.53% in June, broadly steady after edging up from 8.51% in May and 8.50% in April. Two or three basis points don't mean much on their own. What matters is how fast that change now reaches a borrower.
That's because India rebuilt how rate changes travel through the lending system over the last few years — and most people outside a treasury desk never noticed. More than two-thirds of floating-rate loans are now linked to external benchmarks that reset within one to three months of a repo move. That's why the last round of cuts felt so quick to borrowers. It's a two-way street, though. The same wiring that made rate cuts feel instant is now carrying the signal in reverse, at the same speed.
Deposits are moving too. Fresh term deposit rates rose by 16 basis points in June alone. That means banks are starting to pay more for funding, even as lending rates are only beginning to move up. If that gap sticks around, it can put pressure on margins before it starts showing up in quarterly results.
Loans still sitting on the older MCLR system move more slowly by design, so the overall book will keep looking calm for a while yet. Fresh loans are already telling you where this is headed. If you're only watching the outstanding book, you're reading a weather report from a few months ago, not today's forecast.
I flagged some of this fragility when I wrote about how this economy was already breaking underwriting models. Most affordability math assumes a borrower's spare cash flow stays fairly constant. That was never quite true, and it's about to be tested harder. It's the same bill I described in the great repricing of everything. Years of cheap, easy credit made pricing risk feel almost effortless. There's no such thing as a free lunch, and Indian credit is about to find out what its tab looks like, one basis point at a time.
You won't see any of this in a festive ad. It shows up later, when a borrower who took the loan expecting rates to keep coming down gets a renewal quote that looks very different from what they had in mind.
Banks aren't leaving microfinance. They're changing seats
The second report this week, MFIN's latest Micrometer, is a different kind of repricing. This one isn't about what borrowers pay. It's about who's willing to stand closest to them.
Banks' own microfinance portfolio, the loans they hand out directly, fell 28.5% year-on-year to ₹83,080 crore as of June, down from ₹1.16 lakh crore a year earlier. Their share of the overall microfinance market slid from roughly a third to about a quarter in twelve months. NBFC-MFIs, the specialists built for exactly this borrower segment, grew their own book by 5.2% over the same period, even as banks continued to fund them. Debt funding from banks to NBFC-MFIs jumped 91.4% in the first quarter, with banks accounting for 80.4% of the sector's fresh funding.
So which is it? Are banks fleeing the bottom of the pyramid, or funding someone else to stand there instead? Here's the part that makes this more than a retreat story: asset quality across the sector is improving at the same time. Banks aren't running from bad loans. They're deciding they'd rather not originate the good ones themselves either. You can't have your cake and eat it too, unless you fund someone else to bake it for you. Think of it as a bank moving from the driver's seat to the back seat: still very much in the car, just letting someone else hold the wheel. The exposure to India's bottom-of-the-pyramid borrower hasn't gone anywhere. It's sitting one layer back now, behind an NBFC-MFI's own underwriting and collections instead of a bank's.
I saw the early tremors of this two years ago, when repayment delays first started haunting micro-lenders, and again when the three-lender cap tried to fix overleveraging from the top down. This week's numbers are that same correction, finally reaching the ownership structure of the risk and not just its rules.
For banks, this is a way to keep lending to the segment without taking all of the exposure themselves. For NBFC-MFIs, it means taking on more of the direct lending while continuing to rely on banks for funding. Banks are still backing the segment, but they're choosing to do it through someone else.
Lenders are choosing where to take the risk
Neither story is really about interest rates or microfinance on its own. They're both signs of lenders becoming more careful about where they take risk. When money gets a little harder to come by, banks don't necessarily stop lending. They start thinking more carefully about where they want to lend directly, where they are comfortable providing funding, and how much risk they want to keep on their own books.
I wrote about this same trend across the NBFC sector in The shrinking NBFC universe. There are fewer players now, and the ones left are being a lot more careful about where they put their money and what risks they take on. This week, we're seeing the same thing play out again, just in a different part of lending.
Eighteen months of falling rates and expanding credit made almost every lending decision look easy. Cut the price, grow the book, let cheap funding paper over the cracks in your pricing. That era ended on two fronts in the same week. The problem with easy money is that it can hide a lot. Once it gets less easy, those problems have nowhere to hide.
The festive ads will keep saying the same thing for a while. Advertising is usually the last place to catch up when the market changes. But lenders who are paying attention have already started looking past the pitch. The real question is whether your pricing model still works when money isn't cheap. Did you actually build it for that world, or did eighteen months of falling rates make it look better than it was? Six months from now, we'll have a much clearer answer. And it will show up somewhere on a balance sheet.
Reading list
- RBI may use FCNR inflows to shrink its $136.8 billion forward book
- Banks raise fresh deposit rates in June, lending rates edge up: RBI
- Scheduled commercial banks reduced one-year median MCLR to 8.50%: RBI
- Banks' microfinance share falls as NBFC-MFIs drive sector recovery: MFIN
- Banks offer semi-fixed loans to deploy surplus liquidity
Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on X here and follow FinBox on LinkedIn to get the latest updates.
Cheers,
Mayank
All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.
