MUMBAI: The Reserve Bank of India (RBI) has instructed large NBFCs to reveal the total maximum rate charged to customers on each loan product, including interest rates, processing fees, insurance, and other levies. The ceiling rates on various loans – such as mortgage, vehicle, property, gold, and education loans – must now be explicitly disclosed and approved by their respective board of directors.
While the RBI has not explicitly called for rate cuts, its latest directive suggests a tightening regulatory stance. With some NBFCs charging interest rates as high as 36 per cent and cheque bouncing penalties of Rs500, industry watchers believe that the regulator may eventually push for more consumer-friendly lending practices.
By forcing NBFCs to publicly disclose their highest rates, the central bank could be setting the stage for greater scrutiny and future interventions if lending rates remain excessively high.
A regulatory nudge?
While RBI has not imposed any direct caps on lending rates, the new directive acts as a regulatory nudge. “In a free interest rate regime, RBI cannot directly cap rates, but once an NBFC spells out in black and white the highest charge on each type of loan, it would find it difficult to breach it,” said a senior industry official.
Additionally, any upward revision in rates would require board re-approval, creating an added layer of accountability. Industry sources indicate that RBI held discussions with multiple NBFCs before sharing the minutes of these meetings.
To maintain flexibility in final loan pricing, NBFCs are expected to submit a matrix of rates based on parameters like borrowers’ credit score, loan-to-value ratio, repayment ability, loan tenure, and market liquidity conditions.
RBI has so far not commented on this directive. However, some industry experts believe that the move is driven by concerns that certain NBFCs may not be fully transparent about final lending rates, potentially violating RBI’s ‘fair practices code’.
The code, which has been in effect for years, requires NBFCs to adopt an interest rate model considering cost of funds, margin, and risk premium. It also mandates clear disclosure of interest rates and the rationale for charging different rates to various borrower segments. This information must be provided upfront in loan application forms and explicitly communicated in sanction letters.
Household indebtedness
Though household indebtedness in India remains lower than in many emerging economies, RBI has noted a sharp rise over the past three years. According to a September 2024 report by credit rating agency CARE, household financial liabilities reached 5.8 per cent of GDP in FY23 – the highest in 16 years – compared with a pre-pandemic average of 3.4 per cent.
While rising leverage for home investment may not be an immediate red flag, rapid growth in unsecured lending by NBFCs and fintech firms remains a concern.
While the RBI has not explicitly called for rate cuts, its latest directive suggests a tightening regulatory stance. With some NBFCs charging interest rates as high as 36 per cent and cheque bouncing penalties of Rs500, industry watchers believe that the regulator may eventually push for more consumer-friendly lending practices.
By forcing NBFCs to publicly disclose their highest rates, the central bank could be setting the stage for greater scrutiny and future interventions if lending rates remain excessively high.
