About The Weighted Average Lending Rate (WALR)

Weighted Average Lending Rate (WALR):

• The Reserve Bank of India (RBI) has barred Asirvad Micro Finance Ltd, Arohan Financial Services Ltd, DMI Finance and Navi Finserv from sanctioning and disbursing loans for violation of multiple rules, including excessive pricing of loans. The ban on these non-bank finance companies (NBFCs) will come into effect from October 21.
• Asirvad Micro Finance is promoted by Manappuram Finance, a leading gold loan company, and Navi Finserv is promoted by former Flipkartco-founder Sachin Bansal.
• Japan’s Mitsubishi had recently invested $334 million in DMI Finance, founded by Shivashish Chatterjee and Yuvraja C Singh. Former DFS secretary D K Mittal is the chairman of Arohan.
• This action is based on material supervisory concerns observed in the pricing policy of these companies in terms of their Weighted Average Lending Rate (WALR) and the interest spread charged over their cost of funds, which are found to be excessive and not in adherence with the regulations,” RBI said.

About The Weighted Average Lending Rate (WALR):

It is a key indicator used by central banks and financial institutions to assess the cost of borrowing in an economy. It reflects the average interest rate that commercial banks charge on loans, weighted by the volume of loans across different sectors or types of loans. It provides a better understanding of the actual interest rate faced by borrowers, compared to just considering the base rate or policy rates like the Repo Rate.

Key Aspects of WALR:

1. Weighted by Loan Volume: WALR is calculated by giving different weights to different types of loans based on their share in the total lending portfolio. For instance, if a large portion of a bank’s loans are at a lower interest rate (like home loans), it will reduce the overall WALR.
2. Covers All Loan Categories: WALR includes all types of loans—short-term, long-term, secured, unsecured, personal, and business loans—giving a comprehensive picture of lending rates across the economy.
3. Tracks Changes in Borrowing Costs: Since WALR reflects the actual lending rates faced by borrowers, it can provide insights into how monetary policy changes (like cuts in the repo rate) are being transmitted into the economy.
4. Used by Policymakers: Central banks, like the Reserve Bank of India (RBI), monitor WALR to evaluate how effective monetary policy changes (like adjusting the repo rate) are in influencing actual lending rates. A decrease in policy rates should ideally lead to a decrease in WALR, signaling cheaper credit availability for businesses and consumers.
5. Indicator of Credit Conditions: A high WALR indicates that borrowing is expensive, which can slow down investment and consumption. Conversely, a low WALR suggests that credit is cheaper, potentially boosting economic activity.